The worry for all the doom’ers is when will China pull the plug on the US. No doubt, with the amount of economic instability that there is out there in regards to the US’s financial house gives everyone who is in their right mind a reason to worry about the future outlook on this country. China is actually one of the many catalysts that could send the dollar into a hyper-inflationary situation in the mind of the preppers, but the fear of China cutting off their ties to the US is a major concern for those invested and for those who won’t invest because of the problems that loom.
I really like this article that was written by David Fessler of the Oxford Club. He puts the threat into perspective for everyone who is ready to only buy physical gold and live in a bunker.
The way he sees it, is that China is as tied to the US, as the US is to China…
Enjoy this read,
Chief Editor at CrushTheStreet.com
Original Article: http://www.investmentu.com/2013/October/why-china-wont-dump-us-debt.html
by David Fessler, Energy and Infrastructure Strategist, The Oxford Club
Tuesday, October 22, 2013: Issue #2148
Washington’s debt-default crisis gave China the perfect opportunity to taunt the U.S. government, and – with the editorial from Beijing suggesting the creation of a “de-Americanized” world – the Chinese sure took it.
Could China bring the United States to its knees without ever setting foot here, just by virtue of its ownership of more than $1.27 trillion in our debt?
No. It’s all smoke. Economically, the Chinese are too far in bed with America to get out anytime soon. The South China Morning Post reported that Beijing continues to add to its U.S. Treasury stockpile. While U.S. data on Treasury purchases since last July isn’t available, China’s foreign exchange reserves increased by $163 billion in the third quarter, most of it from U.S. Treasury purchases.
But what are China’s options if it wants to sell some of its U.S. debt to diversify its holdings?
The short answer: It doesn’t have many. Let’s look at some of them:
No other country besides the United States has enough of its money in circulation to meet China’s needs. Further, no other currency is as safe as the U.S. dollar. For example, as the economic crisis of 2008-2009 deepened, countries flocked to the U.S. dollar (in the form of Treasurys) as the only safe-haven investment. The bottom line: Despite the rhetoric in Washington, there is no other country in the world with a currency as safe and as strong as the U.S. dollar.
Way too risky for China or any other country. The least risky at this point are those of U.S. companies. So it would really be buying American dollars anyway.
The value of all the gold in the world at current prices ($1,280 an ounce) is $6.6 trillion. Roughly 75% of that is in the form of coins or jewelry, which is not available to governments. There’s not enough gold for China to buy.
China’s Hooked on Treasurys
In order to keep the value of the Chinese yuan from appreciating versus the dollar, China’s central bank must buy U.S. dollars in massive quantities. Rather than just sitting on the physical currency – which pays zero interest – it buys U.S. Treasurys.
Not only will China continue to buy our debt, it must continue to buy it. Its exchange rate policy dictates it. Selling Treasurys would reduce the value of the yuan, something China can’t afford. In other words, we need China to buy our debt to finance our annual federal budget deficit. China needs to buy dollars to prop up its currency.
For better or worse, China and the United States have an incestuous financial relationship that welds the two countries together. It’s in both countries’ best interest to see that things stay that way for a long time.