Is it or isn’t it?
This article from the International Herald Tribune suggests in the headline that the Chinese appetite for US Debt is decreasing. The funny thing is that when you actually read the article, there’s not a lot of meat backing up the suggestion. New data is coming soon, but what I vaguely hinted at last week will likely be the case.
From the article:
Normally, China would be the most avid taker of the debt required to pay for those deficits, mainly short-term Treasury securities. In the past five years, China has spent as much as one-seventh of its entire economic output on the purchase of foreign debt – largely U.S. Treasury bonds and American mortgage-backed securities.
But now, Beijing is seeking to pay for its own $600 billion economic stimulus – just as tax revenue falls sharply as the Chinese economy slows.
What the article doesn’t say, but what is clearly the elephant in the room, is that without access to cheap credit for the US, China’s export boom will die. So while they may look to spend $600B internally, the Chinese still have roughly a roughly $30B monthly trade surplus (down from $50B) and almost $2 Trillion in reserves that will have to find a home somewhere. If China tries to dump its US reserves it’ll cause itself collateral damage as the dollar collapses.
However, what seems clear to me is that the Chinese have effectively pulled out of the agency market in the US as well as the equity market and have focused their entire purchasing power on Treasuries. That’s why we have negative real yields on the short end of the curve (and probably on the long end as well eventually.)
Pay attention because here comes the coup de grace.
Going back to my Friday night thought, it’s the Chinese that have allowed the US Treasury to cheaply act as the CDS counter-party of last resort and, in fact, provided the capital to refinance all this toxic garbage at insanely low rates.
The catch? They sucked every last dollar/yuan out of every other capital market in the United States.
Why? Because they were holding all the toxic MBS debt and they wanted fresh Benjamins (aka Treasuries) instead of the monopoly money (aka agency debt which is “like treasuries but with a better yield”) the US had been pushing on them since 2001.
In one fell swoop, the Chinese forced the US to provide them with CDS protection on their entire portfolio of agency debt and MBS. That’s why every other investor in the US just lost their shirt. The Chinese called up and told the Treasury that it had to act as a collection agency for all the bad debt it had sold. So the Treasury turned around and confiscated as much capital as it could and pretended to save the American middle class when it was simply saving China.
To what end? To prevent a currency melt-down and the immediate impoverishment of the US.
