In this article we are stating why China will not dump its US dollar assets as an act of revenge in the US Trade War!
We have in recent months produced many podcasts highlighting the trade/tariff war between the US and China and their relevant repercussions.
Many pumpers and conspiracy theorists are voicing the notion that China will take the ‘nuclear’ option and dump its holding of US Treasuries estimated currently to be worth around $1 trillion. Their theory goes like this:
China may sell its $1 trillion holdings of Treasury bonds and crash the Treasury bond market. Since the interest rate is inverse to the bond price, a crash of the price would result in rates skyrocketing causing the US government to face spiralling costs of servicing its debt, and quickly collapse into bankruptcy.
Only last week we produced a podcast entitled:
“US Dollar Collapse – How soon is it likely to happen?” a link is shown below:
https://www.youtube.com/watch?v=_Ay7kGPh8_I&t=2s
In that podcast we highlighted the various causes which may result in the US dollar devaluing and specifically address the threat of China doing what Russia has done which is the wholesale sale of its US Treasury Holdings but pointed out why this is extremely unlikely – especially considering the impact on the bond value such a sale would cause thereby reducing China’s asset so significantly that the economic ‘hit’ would prove quite devastating.
However, there is another reason why such a move is also unlikely which we did not cover and believe is worthy of mention and it goes like this:
Businesses around the world, borrow US dollars. They must earn dollar revenue to service this debt. A trade war reduces the volume of trade and can seriously deplete the profitability of any trade that survives. Therefore, it makes dollar debtors more desperate for dollars. (Thus, the predictive reasons why the US dollar may still strengthen further as the trade dispute continues).
Any selling currently undertaken by China of the US Dollar is simply China taking the other side of the trade, of those who are selling yuan to buy dollars. China does not want the yuan to collapse, so when there is heavy selling pressure it steps up as the buyer. Which means selling its dollar reserves.
This is why you have seen headlines such as those which appeared recently in The Financial Times “China dumps US Treasuries at fastest pace in two years” – it’s not because China does not have faith in the US dollar or is trying to punish the United States but it needs to do this to prevent its own currency, the Yuan from collapsing – Now you don’t hear the pumpers telling you that do you?
The price of the Yuan is under China’s control, so long as its dollar reserves hold out. If it runs out of dollars, then the world will discover what the market value of the Yuan really is as China will not be holding these assets in order to sell to repurchase the Yuan and prop up its price. Its dollar holdings therefore are an important reserve that it cannot afford to squander, especially as the result of a trade dispute which in the fullness of time can be easily rectified.
Almost everyone who listens to this channel is aware that the National Debt of the US at $22 Trillion is practically unpayable and so to is the National Debt of most major Industrialised nations. The best most can hope for is not the repayment of the debt but its servicing and this equally applies to China. It is this debt servicing which is increasing the demand for US dollars and the de-facto reason behind its strengthening. Even this morning the dollar index stands at 98.06 again marginally up from its close on Friday.
The conclusion, therefore, is unless there is a complete economic reset and/or debt jubilee, or all world currencies agreeing to a single currency, or their existing currencies being supported by say a gold type standard, then they are all trapped in this system of irredeemable currencies with the dollar as the world’s reserve.
This position is not going to change any time soon and China is not in the business of cutting off its nose to spite its face by dumping US Treasuries on the World markets. That is our view what is yours? – do share!
“US Dollar Collapse – How soon is it likely to happen?” a link to which is placed in the description below.
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