Is cutting US debt holdings a way out? (China)

People's Daily ^ | 10/18/2013 | Yao Chun

[TexGrill]

Democrats and Republicans reached a compromise on the US debt ceiling, putting an end to the White House shutdown on Thursday morning and bringing a temporary solution to the debt crisis. Nonetheless, the 11th-hour deal will stay effective only till February 7, 2014 and the two parties will face the possibility of another bitter budget calamity early next year.

As the single largest foreign creditor of the US, China has every reason to feel anxious. It has been years since Chinese started calling for the central government to slash US debt holdings and such appeals have been flaring up recently.

China's business analysts hold diverging views on whether the government should cut back US debt holdings and whether it is realistic to do so. Scholars who support a huge reduction have drawn wide attention and even been applauded by the general public, but the reality is that China's US debt holdings are on the increase despite short-term reductions.

Therefore it seems not so simple. Those in favor of increases in US debt holdings or maintaining the status quo contend that there is no better channel for China's large foreign currency reserves accumulated by an enormous amount of trade surplus. As the biggest economy and a financial power, Washington has many ways to deal with Beijing's reduction of its national debt. However, such reductions will, in turn, expose China to more risks.

[TexGrill]

Global business tip

[rdcbn]

Chinese buying of American debt is what is keeping the dollar artificially strong compared to the Chinese currency.

The minute China stops buying American debt , their currency exchange rate will double, killing their export business to the US.

This could be a bit problematic because the entire Chinese economy is dependent upon exports to the US to keep their economy, which is a mile wide but an inch deep, going at it’s current. pace.

Any exchange rate spike against the dollar will implode the Chinese economy and the only thing preventing such a spike is massive Chinese purchase of American debt.

[Vince Ferrer]

It is not so easy for China to reduce the treasuries they buy from us, even though they want to. This is because of the trade deficit. In exchange for dollars, the US buys stuff made in China. The companies then take the dollars and buy US treasuries. So the balance of treasuries is directly dependent on the deficit. If they start using dollars to buy things from us, they don't need to buy treasuries.

They do know this, and are increasing their purchase of assets here, especially real estate.

[kaehurowing]

They are also investing their dollars in other things, such as a plan to dig a new canal across central America through Nicaragua.

Since a Chinese-controlled oompany now controls both ends of the Panama canal, once the new canal is completed they can then shut down the Panama canal and force all traffic through their new canal. This will both make them a fortune, and screw over the United States.

[BfloGuy]

They do know this, and are increasing their purchase of assets here, especially real estate.

And I hope they also know that if they buy too much, inflation will be worsened here and they will have to inflate even more to keep the Yuan down.

What a fine mess we're all in. It can only end one way.