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  • China Loves The Dollar

    Remember when China was going to stop buying American bonds and the world was going to end? This hand-wringing was always wrong-headed; perhaps now it will finally cease.

    In May, net official Chinese holdings of U.S. Treasuries jumped $38 billion. This is the flip side of the return of large-scale capital inflows into the PRC, after these were interrupted by the financial crisis.

    Net official Chinese holdings of U.S. Treasuries do not constitute the last word. They miss some less direct Chinese purchases of Treasuries and all Chinese purchases of other American bonds, such as those sold by U.S. government agencies. Still, they are the most prominent signal of Chinese behavior.

    In the past 12 months, the PRC has increased its official holdings of Treasuries by more than 50%. When a great deal of foreign money is flowing into China, it has no choice but to buy American bonds – there’s no other place to put the $400 billion a year the PRC has been racking up. Cheap talk aside, China is actually the biggest supporter of the dollar. It has no choice.

    The biggest underminer of the dollar is our own government. Congress and the President are pushing federal borrowing to levels previously unimaginable. In fact, the larger Chinese purchases are just a natural outgrowth of the U.S. government flooding the market with debt. We don’t have to worry that much about what Beijing will or won’t do in the future with regard to bonds– we should worry about what Washington is doing right now.

    Posted in International [slideshow_deploy]

    3 Responses to China Loves The Dollar

    1. Spiritof76 says:

      What do you think the Chinese will do when the US inflates the dollar to payback the debt, just like the Weimar Republic? Do you think China will meekly go away or exercise its military muscle?

      $100T debt and unfunded liabilities do not give much room for any shine on the dollar. That is the kind of stuff major wars are made of.

    2. Whicket Williams Kin says:

      China Has Already warned them to stop it. Of couse, they won't The end of the world is here get down on your rusty old knees and get right with God, HE will be here soon!! Why do you think all the ancient calenders stop in 2012?

    3. Steve J. Nelson says:

      I believe Heritage cannot square the circle between advocating an aggressively anti-China, anti-Russia foreign policy (or at least from Moscow and Beijing's point of view, since Heritage would never find large scale presence of Chinese advisors and explicit Chinese plans to divert Venezuelan oil from the U.S. to China acceptable as Russia is supposed to accept pipelines that bypass its territory and U.S. advisors on its doorstep) and scoffing at any Russian and Chinese efforts to dump the dollar and dollar-denominated debt such as U.S. government securities. It's as if Heritage is too embarassed to admit that ongoing operations in places like Iraq and Afghanistan depend in large part on the willigness of foreigners to continue lending the U.S. money even as it criticizes the Obama Administration and Fed for inflating the dollar. At some point, these two positions are going to meet and result in some contradiction. Russia's Central Bank BTW was the 4th largest holder of Fannie and Freddie paper in September 2008.

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