Posted on 09/05/2008 3:32:16 AM PDT by TigerLikesRooster
Main Bank of China Is in Need of Capital
By KEITH BRADSHER
HONG KONG — China’s central bank is in a bind.
It has been on a buying binge in the United States over the last seven years, snapping up roughly $1 trillion worth of Treasury bonds and mortgage-backed debt issued by Fannie Mae and Freddie Mac.
Those investments have been declining sharply in value when converted from dollars into the strong yuan, casting a spotlight on the central bank’s tiny capital base. The bank’s capital, just $3.2 billion, has not grown during the buying spree, despite private warnings from the International Monetary Fund.
Now the central bank needs an infusion of capital. Central banks can, of course, print more money, but that would stoke inflation. Instead, the People’s Bank of China has begun discussions with the finance ministry on ways to shore up its capital, said three people familiar with the discussions who insisted on anonymity because the subject is delicate in China.
(Excerpt) Read more at nytimes.com ...
Ping!
they’ve waged economic warfare on us for years. Turnabout is fair play.
Oops!
So we have actual tangible products from them and they have a bunch of paper. Kinda of sneaky... hehe.
A question for all the posters who are gleeful this is happening to China.
What do you think will happen to the USA dollar and the stock market in the USA if the central bank of China is forced to dump on the market all of this financial “paper” denominated in US dollars?
Oh stop. I’m making fun of all the doom and gloomers who said China would take over the world. In reality, we have hard product and they have paper. If a real war broke out, we could declare their paper as just that.
This is just as much a problem for the USA as China. This is one reason why the stock markets worlwide have so terrible this week.
Not really! If they did that, they would flat out destroy their own economy and they know it.
You're asking what would happen if China sold all its T-bills for sale today at a huge loss? Let me know if it happens; that kind of buying opportunity is something that few can see in a lifetime.
Real life on planet Earth though, debt holders know how to cut losses with unloading debt. Many of the notes are already redeemable directly with the Treasury Dept. at full value. The rest can go slow with no loss or fast at bargain prices. It's not really a new story here.
Yes there is. The Market. There isn't a market for trillions of dollars of US T-bills. If they started to sell a fraction of what they held the interest rate of the bills would plummet - they'd be discounting the sales to move them, bringing the interest rates paid on all T-bills down. Meaning the effect on us is greatly minimized (we have to pay less interest over time), and they lose even more money.
The old maxim always holds true: if you owe the bank $100,000 the bank owns you. If you owe the bank $100,000,000 you own the bank.
It is exactly what has been happening in the USA with some of the major financials over the last year.
Tomorrow's Saturday and my brokers are closed; dang!
Now if only they'd sell them all on Monday and I could pick up a few $10k T-bills due next year for just $87.50 each....
Interest rates will spike.
The rest of the "funded by helicopter money"-based industries and businesses in the U.S. will collapse.
The dollar will fall.
The yuan will rise.
The arbitrage offshoring of jobs to BRIC will come to a screeching halt.
China will suffer massive unemployment *and* inflation (paradoxically, since there is not enough of a middle class in China to afford the goods they produce for export, nor enough of an infrastructure in terms of existing homeowners, etc., to have a need for all of the items they are producing for the U.S.).
And China will either revert to Communism or Fascism, and seek military expansionism to seek to distract the populace from the failures of their dictators.
Look out Russia, Austalia, and (god forbid, and due to its land and fresh water) Canada.
Cheers!
Bingo!
Let’s put things in perspective here. The 10 year note is the most heavily traded of our treasuries, so they likely have most of their holdings there, with some 30 year bonds and some 5 years.
Even the 10 year trades maybe 1 million contracts a day. At night (when China is awake), liquidity is far lower...I’d say we generally see <100,000 10 years trade from the open at 5:30pm until 5 or 6am. They’re $100,000 contracts, so a trillion dollars is 10 MILLION contracts.
Even if they tried to unload 100,000 contracts a day, they’d shove things way out of line and take a bath on their fire sale. And they’d have to do it for 100 days to liquidate 10 million contracts...so the first day or two small time traders would probably get steamrolled.
But it would become very obvious who was doing it, and every one of the major US banks (Merrill, Goldman, etc) would take notice, not to mention their European equivalents. Having the market find out that you hold a very large position and are trying to get out of it is very very bad, because they’ll start attacking your position.
If China tried putting ridiculously big offer orders in, the market just wouldn’t pay up into them. On top of that, institutions would pull their bids, so China would have to sell small amounts at a time, paying down into lower and lower bids. They would lose far more money than they ever would holding their position through the highest interest rates (lowest prices) the 10 year note could ever hit.
I also agree with you. My original post was just to point out that with China holding all of this USA debt, we shouldn’t get too excited that China is in financial trouble.
One reason that China and the USA have to be nice to each other is because of this debt.
It’s MAD without the nukes.
What US bank would fail from China selling it’s T-bills? It would pound the Chinese banks, not the US banks. In fact, because China would have to price the bills at below-market value, you’d see a lot of US banks picking up heavily discounted T-bills, strengthening their own bottom lines.
China dumping the bills on the market would crush China economically, and really do nothing to the US long term (short term there may be some jittery folks who will dump along with China, causing a bit of a bump but nothing serious).
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.