Britannia Radio

China Dumps US Asset Backeds and Corporates

February 9th, 2010 
By David Goldman

http://blog.atimes.net/?p=1352

Dollar-denominated risk assets, including asset-backed securities and corporates, are no longer wanted at the State Administration of Foreign Exchange (SAFE), nor at China’s large commercial banks. The Chinese government has ordered its reserve managers to divest itself of riskier securities and hold only Treasuries and US agency debt with an implicit or explicit government guarantee. This already has been communicated to American securities dealers, according to market participants with direct knowledge of the events.

It is not clear whether China’s motive is simple risk aversion in the wake of a sharp widening of corporate and mortgage spreads during the past two weeks, or whether there also is a political dimension. With the expected termination of the Federal Reserve’s special facility to purchase mortgage-backed securities next month, some asset-backed spreads already have blown out, and the Chinese institutions may simply be trying to get out of the way of a widening. There is some speculation that China’s action has to do with the recent deterioration of US-Chinese relations over arm sales to Taiwan and other issues. That would be an unusual action for the Chinese to take–Beijing does not mix investment and strategic policy–and would be hard to substantiate in any event.

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1. xinglongnite Says: 
   February 10th, 2010 at 10:13 am

   I believe it is the first big conflict of this century. Obama’s government zeroed-in on trade relation with China since its inauguration, and it took this long until it had its first opportunity to gather the forces in preparation for an all-out assault. The export doubling initiative is part of if, Obama’s escalating rhetoric on the RMB exchange rate is part of it, and the rising tide of US trade sanctions against chinese goods is part of it.

   China is not Japan, and the RMB could not be pushed around like the Japanese yen in 1987. In the last China-EU economic summit late last year, Wen Jiabao stated clearly that the west’s demand for the RMB to revalue is fundamentally unfair, and if the RMB is to revaluse, it has to be orderly, and gradually.

   Since it’s unlikely the US could double its export without either another 30% devaluation of the dollar against major world currencies in theory, and the US would not and could not voluntarily weaken the dollar just for the sake of increasing export, so the next plausible thing for Obama to do may be to force the RMB to revalue.

   Obama’s budget basically reflects a legacy government with its framework largely left behind by its previous administration. It may have enough, with large deficit, to hold the economy togather without spiraling into 1930 style depression, but it certainly hasn’t pulled the country out of a trajectory similar to that of Japan’s 90s. (your dissertations on the commercial lending is pointing to basically the same trajectory.) But the angry voters are clearly not in a mood to let Obama do anything bold any more. So in order to break out of the economic log jam, it’s quite natural to shift the problem to outside of the US, in particular to China, preferrably. That is the essense of his export doubling initiative. Think who else could take that much more US export year after year?

   So one way or another a major confrontation is set to take place between US and China.

   But China is clearly doing its thing quietly: its trade surplus continued to shrink to $14.2 billion. Its January import rose 90% year-over-year. With its trade surplus vs the US hovering around $20 billion, it seems China has worked to maintain a trade deficit with the rest of the world.

   I believe the show down would ultimately go down the same path as Copenhagen: that China would move quickly to the high ground, neutralize Obama’s hand, and increase its advantage, but hope to eventually reach a so-called win-win compromise of sorts.

   For Obama it could go down to the threat of all out legislative offensives — 30% tariff against all chinese imports, etc. But in the end, as China’s recent threat to impose sanction on companies involved in the weapons trade to Taiwan would suggest: there really isn’t much for the US to gain, and only the EU countries and Japan would benefit.

   But the trouble is that Obama’s government lacks the speed and congressional support to get what he wants. His opponent is China, not senatorial republicans.