By Zine Larbaoui
From the theoretical De-Americanization to its practical application, we are witnessing one of the most major financial phenomena without, for the moment, its consequences being too visible.
A few months ago, at the height of the psychodrama on raising the U.S. debt ceiling and the political gridlock in the U.S. Congress, while the United States was aware of a “possible shutdown,” China warned the U.S. almost officially and indicated in a strong way it would proceed in the De-Americanization of its own economy by reducing its toxic exposure to U.S. debt and the U.S. dollar.
China, the world’s largest holder of U.S. debt, has so far used 3 steps to achieve its policy of De-Americanization.
The first is based on massive purchases of precious metal physically delivered to China which has become, in less than 3 years, the world’s largest consumer of gold before India. Indeed, it is China and its massive purchases that supported the gold price during the significant correction period in 2013 and now, since the beginning of 2014, helped push prices back up.
The second step is based on the multiplication of bilateral agreements to trade in yuan (Chinese currency) and reduce China’s share in foreign trade via the dollar currency. Such agreements in currency exchanges have multiplied throughout the year 2013 and have amplified since the last quarter of 2013. Even China and Japan, whose relationship are strained, have signed such an agreement.
The third step is, meanwhile, China using its reserves in dollars to buy hard assets abroad such as land and companies in the U.S. or Europe. In this case, China dumps its depreciating dollar reserves against real assets.
There is a 4th step which is quite difficult to execute without destabilizing world sovereign bonds markets, chief among them, the US Treasury. Again, China is by far the largest holder of US debt…if it would really want to De-Americanize its foreign exchanges, it could dump its mountain of US debt altogether…a hypothesis that would be almost considered as an act of war from the US point of view. However, it is unthinkable the Chinese would liquidate all at once their share of U.S. debt due to the geopolitical risks that such a decision would entail.
Yet, we have learned that, indeed, the Chinese have massively disposed of a great chunk of its U.S. debt holdings! In December 2013, China has sold $47.8 billion worth of U.S. debt according to an unnoticed press release by Bloomberg financial news on 18 February 2014 and hardly commented upon, of course.
“The nation pared its position in U.S. government bonds by $47.8 billion, or 3.6 percent, to $1.27 trillion, the largest decline since December 2011, according to U.S. Treasury Department data released yesterday.”
Almost everything was so tersely summed up in these two and a half lines by Bloomberg. Indeed, China has sold in December 2013 up to almost 50 billion of U.S. Treasuries while at the same time, the Fed (the U.S. central bank) reduced its own direct purchases of U.S. debt. An explosive situation on the international bond market stands as an understatement!
Obviously, the combination of reduced purchases of U.S. debt by the U.S. Central Bank itself and a massive sale of Treasury bills by China is simply an explosive situation in the global bond market! Such movement is simply not tolerable, at least if these two phenomena would prove to be durable.
It’s one thing or the other: either there is a single warning shot from the Beijing authorities and in this case, China, failing to further increase its position in U.S. debt, maintains more or less its current holdings. The other is China actually decides to dump on a regular basis, $50 billion of U.S. debt and in this case, the global market would absorb them, which is obviously impossible since the U.S. emits on their side several billions of new debt every month…
This is precisely the reason why the Fed redeems the massive debts of the US government. You see, there are not enough buyers to finance U.S. debt, especially with such low yield (at 10%, everyone would want to buy Uncle Sam’s debt but at 2.8% on the 10 years bond, there is clearly fewer volunteers!) This means that if the Chinese policy of dumping US debt continues…then the Fed will resume its monetary creation and again massively buy the obligations of the U.S. government and probably even more than before. In such a case, the reduction of QE may not be sustainable and Janet Yellen will have to change direction quickly.
Obviously, when one learns that China has just sold $50 billion in Treasury bills, one wonders where the money went and who was the recipient…
Officially, it is the U.S. Treasury Department itself that informed us, in its data tracking of major foreign holders of Treasuries, that indeed, China reduced its exposure by 50 billion, while at the same time, Belgium, ranking 4th in US debt global holders, had just the most surreal climb in the Treasury Department’s ranking, since Belgium has outgrown its holdings – hold your breath – from 200 to 250 billion in one month, which is a considerable increase.
So why Belgium? To be honest, no idea. Moreover, is it the Belgium government or the Central Bank of Belgium (The National Bank Of Belgium)? It may also be Europe since Brussels hosts the European Commission and a whole bunch of bureaucracies.
In short, for the moment, no facts, but many speculations and assumptions. What is certain is that the China’s $50 billion was absorbed by our Belgian friends.
Understand that this kind of information must help you realize that the world economic system as we know it is out of breath, which implies logically that you should prepare for major changes – but that does not mean we shouldn’t hope for the best.
So we have to carefully watch for changes in the bond markets because if China continues its massive dumping of Treasury bills, it is not our poor Belgians friends, as nice as they are, who will replace the Chinese buyer who seems to become a massive seller…
The US, no doubt, in order to kick the can further, will use their “power of persuasion” in convincing other nations to buy their rotten bills on the backs of their constituents who unwittingly will be left holding the bag.