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This article necessarily has a lot of business jargon content, and I'm having trouble parsing it. Could somebody with subject knowledge please summarize the art

by Elrac 11y ago

This article necessarily has a lot of business jargon content, and I'm having trouble parsing it. Could somebody with subject knowledge please summarize the article in terms a simple hacker can understand, and speculate a bit on the possible ramifications?

CmonDev 11y ago
A bunch of numbers stored on different servers will change. No ramifications for non-wealthy people.
- leereeves 11y ago
  The state of China's economy (of which this action is a small part) has a lot of ramifications.
dekhn 11y ago
Treasuries are securities that the US government sells. It's a piece of paper you can buy, that promises the US government will pay you back, with interest (simplification) at some point in the future. People with spare cash (which goes down in value over time) can put their money into Treasuries, with a very high expectation they'll get some some interest over their invested principle. US Treasuries are considered a very good "stable" investment in that the risk of not getting back your interest or principal is very very low. China bought a lot of these when they had lots of spare cash. These things involve so much money and are integrated in the US monetary system that rapid changes of their ownership can have big impact in US economy (world's largest) as well as large markets (big simplification; there is a bunch of macroeconomic theory, as well as a bunch of irrational behavior that causes shifts in markets). By selling these, the supply of treasuries will go up, which will probably reduce their value, which will have ripple-through effects on the economy. Beyond that it's truly hard to evaluate the specific ramifications. The stock market is constantly evolving around a large number of indenpdent agents most of which behave irrationally.
- msandford 11y ago
  > The stock market is constantly evolving around a large number of indenpdent agents most of which behave irrationally. I think they actually behave rationally, but all according to different fact-bases. People usually don't say "this is really dumb but I'll do it anyhow" most of the time, most of the time they really believe that they're doing something pretty rational. But a lot of times they have incomplete, ignorant, or just plain crazy fact bases from which they operate. Or in the case of China, they want to defend their currency peg. You might disagree with their decision to peg, but if you accept for a moment that this is their goal, then it's super rational.
  - bsbechtel 11y ago
    >But a lot of times they have incomplete, ignorant, or just plain crazy fact bases from which they operate. Yes, and sometimes they have different short term and long term goals, sometimes not all financial, that change their rational behavior.
  - Beltiras 11y ago
    "I understand why I shouldn't but I still will." I think that statement is irrational. It still describes a plethora of behaviors.
  - deathhand 11y ago
    Asynchronous information/ability to do is the basis of capitalism.
  - jerednel 11y ago
    I don't know about that. Lots of people make emotional decisions when it comes to money and will sell at the first sign of trouble. I think personal finance is one area where many are not rational.
  - justincormack 11y ago
    That is not the technical definition of "rational" from economics though, which is what the models of markets are based on.
inspectahdeck 11y ago
China owns a ton of US treasuries. It will sell some of those in exchange for dollars. It will then buy it's own currency, the Yuan, with those dollars. Selling treasuries will make US bond prices go down. Buying Yuan will increase it's price versus the dollar. So, this is a move by China to prop up the value of it's currency.
- beauzero 11y ago
  ...correct in a normal world. China is not normal. Their currency is pegged to the dollar. They are trying to decouple (see IMF comments delaying their inclusion for another year). They are lowering the peg which is increasing the dollar vs. ren. This in effect is lowering/devaluing the ren. which makes manufacturing cheaper there. Other emerging markets are also decoupling so that they can devalue their currency in order to keep up with the Chinese active devaluation. Currently other major markets Germany, Japan, etc. are not actively devaluing. If they do we will have a currency war. This would be very very bad. ...this article is only describing one aspect of a very complex picture right now. One that you could argue has not been seen previously. That and the weird illiquidity problem that happened Monday with ETFs. It makes for a very odd picture right now.
jpollock 11y ago
Interest rates are determined as the inverse of the bond rate. I have no idea how accurate this is, but here's my thinking... So: 1 selling bonds (treasuries) will lower the price of the bond (supply/demand). 2 This will increase the effective interest rate - (face value - price paid)/face value / years for simple straight line rate. 3 The higher interest rate will cause more money to flow towards that currency (USD) 4 That will result in the USD appreciating against all other currencies 5 China then uses the proceeds to buy Renminbi, driving it up against the USD 6 That USD->Renminbi sale might result in a drop in USD because there will be more USD around? 7 If enough bonds are sold, this might have the same effect as a Fed increase? 8 An increase in the value of the USD will keep manufacturing jobs from coming back to the US 9 Oil prices will drop in USD (?) 10 China might have a UK vs Sorros moment [1] [1] https://en.wikipedia.org/wiki/Black_Wednesday https://en.wikipedia.org/wiki/Black_Wednesday
- misja111 11y ago
  Point 1 is correct, the selling of bonds by China will have the effect that their prices will drop. That's the law of supply and demand in action. Point 2 will probably also happen; but only up to a limited amount, because: Point 3, and the others, won't happen. There will not flow more money towards the USD. What happens now is the opposite; China is selling USD's. Again because of the law of supply and demand, this will lead to a drop of the USD rate. If the drop will be too much for the FED's taste they will increase the interest rate (point 2), but only so much that the depreciation will stop.
  - RaSoJo 11y ago
    >There will not flow more money towards the USD. What happens now is the opposite; I guess it is an event in the chain. jpollock asks the question in point 6 "That USD->Renminbi sale might result in a drop in USD because there will be more USD around?"
- RaSoJo 11y ago
  Thanks for this. I look forward to more answers on the questions you highlighted in this thread. One additional question I have now is, what about the impending Fed Rate Hike? As in your point 7 - if the China Govt. action is equivalent to a rate hike, then will the Fed's own hike get pushed further into 2016?
ArikBe 11y ago
China holds US debt treasuries. China sells US debt treasuries in exchange for dollars. China sells the dollars it raised to buy Yuan. Demand for the Yuan increases, hence the Yuan becomes more valuable, hence its exchange rate vis-a-vis the dollar appreciates (it will also appreciate vis-a-vis other currencies). Dollars are being dumped into the market, so the dollar should decrease in value. A more valuable Yuan means that China's currency is more expensive, hence its exports become more expensive (and drop) and its imports become cheaper (and rise). Other people now own US debt, for which they will receive interest payments and a repayment when the debt is due.
- RockyMcNuts 11y ago
  More like, there is capital flight from China because there are economic problems and yuan devaluation is anticipated. When people liquidate yuan assets and buy overseas assets, they sell yuan to the central bank, buy foreign currency. In order to buy the yuan, China's central bank needs to supply foreign currency. To acquire the foreign currency, they sell foreign assets, e.g. Treasurys. It's not so much they are trying to push the yuan up, as trying to prevent it from falling too precipitously as people sell it. They are accommodating the capital flight by supplying foreign assets, instead of letting the yuan fall sufficiently sharply to the point that would stop capital flight, because investors would no longer expect further depreciation.
  - RockyMcNuts 11y ago
    in a nutshell, as hopefully others have explained better... before - yuan is undervalued relative to market-clearing price - central banks sells yuan to prevent it from rising too quickly - selling yuan, it acquires dollars in exchange - it builds currency reserves, invests in Treasuries now - yuan is overvalued relative to market-clearing price - central bank buys yuan to prevent it from falling too quickly - buying yuan, it needs to offer dollars in exchange - it sells Treasurys for dollars, sells off currency reserves
- jussij 11y ago
  In terms of supply and demand what you say makes sense, but: > China sells the dollars it raised to buy Yuan. The Yuan is a highly controlled currency that does not behave like other normal free market, floating currencies. The Chinese government sets the exchange rate as was shown just weeks ago when they devalued the Yuan and Trump call that move the start of a China/USA currency war. > Demand for the Yuan increases, hence the Yuan becomes more valuable If the Yuan was free floating that might be true, but even then, since China is a net exporting nation they want a low Yuan, so that their exports are cheaper and their imports are more expensive. So why would they want to drive up the Yuan? I'm really not sure what is going on but everything they are doing (i.e. selling US bonds) goes against what one would expect. The only thing I can think of, because of the turmoil in China (i.e. the share market shock, property bubbles etc) they are a bit short of cash and rather than print money (which would causes inflation) they are raising money by selling some of their US bonds.
deleted 11y ago
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deleted 11y ago
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URSpider94 11y ago
For years, China has been selling its own currency (RMB) and buying USD. This has the effect of depressing the value of RMB vs the dollar, since it puts more RMB into the market and removes dollars. It takes the dollars it owns and buys US Treasury debt. China wanted to keep the RMB artificially low to keep Chinese goods affordable in export markets, which keeps the economy growing. They didn't completely cancel out increases in exchange rate, instead they were managing it to be a slow rise over years. Now that the China economy has started slowing, the RMB has actually started dropping in price vs the dollar. Although good for trade, this is panicking the markets, who expect stability or a slight increase. So, the government is reversing the flow, selling treasuries, selling the dollars, and buying RMB. This is called "unwinding" the position. This unwinding has its own effect on the U.S. markets -- it's going to tend to drive down the price of treasuries, which will INCREASE their effective interest rate. Higher interest rates in the U.S. might threaten the economic recovery -- the Fed has been trying to keep rates low for the past 7 years or so.
- gjm11 11y ago
  I don't think I believe your last paragraph. It's certainly true that when predicted interest rates go up, existing bonds (which have fixed yields built into them) become less attractive and their prices go down. So it's certainly true that decreasing bond prices can be indicative of higher future interest rates. But if bond prices are decreasing only because the Chinese government is unwinding its position in Treasuries, surely that doesn't apply. Parallel example: Suppose I hold a vast quantity of exotic options that pay off in some rather specific circumstances -- e.g., Apple shares increasing by more than 10% during January 2025. And suppose I have carelessly mismanaged my financial affairs so that these are a large fraction of my assets, and now I need more money. So I start selling off these options. That will reduce their market price, but that doesn't (unlike most movements in the price of such options) indicate that anyone actually thinks Apple shares are now less likely to gain 10% in 2025-01. Perhaps there's some subtle way for these artificially decreasing bond prices to cause higher interest rates in the future? I'm not seeing it, but I'm not an expert in finance or economics...
  - URSpider94 11y ago
drcode 11y ago
I can summarize it in one word for you: INFLATION. This will indirectly cause large amounts of US currency to hit the world markets, and the Chinese are going to stop vacuuming up all our excess USD.
benjaminl 11y ago
China has their currency, the renminbi (RMB), pegged to the US dollar. Since the Chinese economy has been weakening and their stock market has been plunging, people have been pulling money out of the renminbi, this has put downward pressure on the renminbi. Now China has acquired vest foreign exchange reserves, mainly in the form of treasury bills, over the years. This was a result of pegging the renminbi to a rate that was artificially to low. Now that people are pulling money out of China, the renminbi might actually be too high. China has had to user its reserves to prop up both the price of its currency and their stock market, to do this they have had to use their foreign exchange reserves. In one estimate, China has already spent $400 billion propping up the stock market and their currency. (http://www.ft.com/intl/cms/s/0/521f9f12-4a56-11e5-b558-8a9722977189.html http://www.ft.com/intl/cms/s/0/521f9f12-4a56-11e5-b558-8a972...) To do this China needs to sell some of it treasury bills. This will have the effect of a minor increasing in the interest rate the federal government has to pay to borrow. While the Federal Reserve has been keeping rates low, it has been signaling for a while that it wants to increase interest rates. So this actually would be in line the Federal Reserve’s monetary policy. In this end the selling of these treasures will have very little effect on the Unites States or the world wide economy. The big worry is that China might be slipping into recession. As the second largest economy, and the generator of most of the world growth, a Chinese recession would be a huge drag on the world wide economy.
- AJ007 11y ago
  Vote up. It is critical to understand how the balance of payments works with regards to international trade to explain what is going on. We can already see the impact China's slowdown has had in the price of raw materials. The massive drop in luxury goods consumption & Macau gambling revenue has been attributed by the press to Xi Jinping's corruption crackdown. I didn't buy that explanation. It is plausible that the economic engine which carried them for the past 20 years ran out of steam a while ago. Contractions are good, for both public economies and private companies. They force the removal of waste and expose accounting frauds. The big question now is how much of China's economy is dependent on questionable things? Perhaps outright fraud, maybe business models that work only during sustained growth, or just stuff that requires the continued successful implementation of particular government policies (subsidizing interest rates, keeping exchange rates low.)
snake_plissken 11y ago
China's currency and it's exchange rate is managed by The People's Central Bank of China. It is not allowed to freely float in value in response to supply and demand for it. However, it is allowed more up or down each day within a set amount, before the People's Central Bank of China will intervene, and in actuality many times the PBOC just does whatever it wants to do it. Which brings us to a few weeks ago, when overnight the PBOC decided Yuans would be worth about 2% less than the day before. The PBOC also expanded that daily trading band to 4% a day. They did this in an apparent attempt to increase exports, as Chinese goods, on paper, became Cheaper overnight, at least in terms of USD. In response to this, there has been downward pressure on the Yuan and now the PBOC, wary about capital flight among other things, needs to defend the Yuan by selling US Treasuries, for which they get US Dollars, with which they buy Yuan on the open market, decreasing the supply of Yuan available, which puts upward pressure on its value. The biggest ramification, I would say, has to do with interest rates on US Treasuries, which influence all types of other debt instruments such as home loans, and of which China has been a huge buyer over the past decade and a half. The interest rate on a 10 Year Note is dictated by how much demand there is for the note. If a lot of people want the note, you can get away with offering a lower interest rate, but if few people want to buy it, you need to increase the rate to attract more buyers.
Spooky23 11y ago
China is selling US Debt, so more dollars are on the market. Since we've been keeping interest rates at zero for some time for political purposes, we lack a lot of controls (ie. interest rates adjustments) to smooth out whatever fallout takes place. The risk is that rates might go up. That isn't the end of the world, but will have a negative impact on stocks. As a citizen, the impact varies based on your position. If you refinanced your house with a 30-year fixed, you're good. If you're on a interest-only ARM, not good.
- dragonwriter 11y ago
  > The risk is that rates might go up. That isn't the end of the world, but will have a negative impact on stocks. There are more effects on the general economy than just the negative impact on the stock market (the direct stock market is one of many direct manifestation of the diversion of investment dollars into Treasuries instead of other investments as Treasury yields increase); upward pressure on interest rates -- that is, an increase in the market-clearing cost of financing given the same demand for financing -- means less financing happens, and thus less of the economic activity dependent on that financing happens, and there is a general economic slowdown, job losses, etc.
  - Spooky23 11y ago
    Not necessarily a bad thing. You have junky companies like Amazon, for example, on a decade long binge of expansion, whose plans depend on cheap access to capital. Their only way to deliver profit is by achieving near monopoly status. Why are we subsidizing that behavior? We have a government on a spending binge, again fueled by cheap access to capital. How is slowing down that train a bad thing? If you look back historically, we have had plenty of boom cycles without the "record low" rates. It's not the end of the world as we know it.
    - jonknee 11y ago
      > You have junky companies like Amazon, for example, on a decade long binge of expansion, whose plans depend on cheap access to capital. Their only way to deliver profit is by achieving near monopoly status. Why are we subsidizing that behavior? On the other hand, most companies are having a hard time investing in their own businesses and are instead buying their own shares to boost EPS. Companies that spend a lot to expand their business are good for the economy, so Amazon has a leg up on most firms there. > We have a government on a spending binge, again fueled by cheap access to capital. How is slowing down that train a bad thing? The government isn't on a spending binge. We've had a Congress unable to agree on anything so we're stuck under a budget freeze that happened thanks to the 2010 Budget Control Act and its sequester. Soft government spending has actually hurt US GDP and slowed the recovery.
ChuckMcM 11y ago
China informed the US that its going to be selling its treasury notes (for dollars) so that that it can buy back renminbi (its currency) in dollars to increase the value of the renminbi versus the dollar. With any other asset this would be a sort of 'who cares', however the US finances its own government debt by selling treasuries and having two sellers on the market means that you start competing for buyers, and you compete by selling them at a discount (which raises their effective interest rate). What that means then is that even though the Federal Reserve is interested in keeping interest rates down, you can see interest rates of treasuries can be pushed up, and for the US, selling new treasuries to finance the deficit will pay more interest (causing the deficit to be that much worse) and that can also push interest rates up. Bottom line, China did the right thing by letting the US know they are pursuing this strategy in order for the Federal Reserve to continue to manage its own economic policy.

by Elrac 11y ago

CmonDev 11y ago

A bunch of numbers stored on different servers will change. No ramifications for non-wealthy people.

leereeves 11y ago
The state of China's economy (of which this action is a small part) has a lot of ramifications.

dekhn 11y ago

Treasuries are securities that the US government sells. It's a piece of paper you can buy, that promises the US government will pay you back, with interest (simplification) at some point in the future. People with spare cash (which goes down in value over time) can put their money into Treasuries, with a very high expectation they'll get some some interest over their invested principle. US Treasuries are considered a very good "stable" investment in that the risk of not getting back your interest or principal is very very low. China bought a lot of these when they had lots of spare cash. These things involve so much money and are integrated in the US monetary system that rapid changes of their ownership can have big impact in US economy (world's largest) as well as large markets (big simplification; there is a bunch of macroeconomic theory, as well as a bunch of irrational behavior that causes shifts in markets). By selling these, the supply of treasuries will go up, which will probably reduce their value, which will have ripple-through effects on the economy. Beyond that it's truly hard to evaluate the specific ramifications. The stock market is constantly evolving around a large number of indenpdent agents most of which behave irrationally.

msandford 11y ago
> The stock market is constantly evolving around a large number of indenpdent agents most of which behave irrationally. I think they actually behave rationally, but all according to different fact-bases. People usually don't say "this is really dumb but I'll do it anyhow" most of the time, most of the time they really believe that they're doing something pretty rational. But a lot of times they have incomplete, ignorant, or just plain crazy fact bases from which they operate. Or in the case of China, they want to defend their currency peg. You might disagree with their decision to peg, but if you accept for a moment that this is their goal, then it's super rational.
- bsbechtel 11y ago
  >But a lot of times they have incomplete, ignorant, or just plain crazy fact bases from which they operate. Yes, and sometimes they have different short term and long term goals, sometimes not all financial, that change their rational behavior.
- Beltiras 11y ago
  "I understand why I shouldn't but I still will." I think that statement is irrational. It still describes a plethora of behaviors.
- deathhand 11y ago
  Asynchronous information/ability to do is the basis of capitalism.
- jerednel 11y ago
  I don't know about that. Lots of people make emotional decisions when it comes to money and will sell at the first sign of trouble. I think personal finance is one area where many are not rational.
- justincormack 11y ago
  That is not the technical definition of "rational" from economics though, which is what the models of markets are based on.

inspectahdeck 11y ago

China owns a ton of US treasuries. It will sell some of those in exchange for dollars. It will then buy it's own currency, the Yuan, with those dollars. Selling treasuries will make US bond prices go down. Buying Yuan will increase it's price versus the dollar. So, this is a move by China to prop up the value of it's currency.

beauzero 11y ago
...correct in a normal world. China is not normal. Their currency is pegged to the dollar. They are trying to decouple (see IMF comments delaying their inclusion for another year). They are lowering the peg which is increasing the dollar vs. ren. This in effect is lowering/devaluing the ren. which makes manufacturing cheaper there. Other emerging markets are also decoupling so that they can devalue their currency in order to keep up with the Chinese active devaluation. Currently other major markets Germany, Japan, etc. are not actively devaluing. If they do we will have a currency war. This would be very very bad. ...this article is only describing one aspect of a very complex picture right now. One that you could argue has not been seen previously. That and the weird illiquidity problem that happened Monday with ETFs. It makes for a very odd picture right now.

jpollock 11y ago

Interest rates are determined as the inverse of the bond rate. I have no idea how accurate this is, but here's my thinking... So: 1 selling bonds (treasuries) will lower the price of the bond (supply/demand). 2 This will increase the effective interest rate - (face value - price paid)/face value / years for simple straight line rate. 3 The higher interest rate will cause more money to flow towards that currency (USD) 4 That will result in the USD appreciating against all other currencies 5 China then uses the proceeds to buy Renminbi, driving it up against the USD 6 That USD->Renminbi sale might result in a drop in USD because there will be more USD around? 7 If enough bonds are sold, this might have the same effect as a Fed increase? 8 An increase in the value of the USD will keep manufacturing jobs from coming back to the US 9 Oil prices will drop in USD (?) 10 China might have a UK vs Sorros moment [1] [1] https://en.wikipedia.org/wiki/Black_Wednesday https://en.wikipedia.org/wiki/Black_Wednesday

misja111 11y ago
Point 1 is correct, the selling of bonds by China will have the effect that their prices will drop. That's the law of supply and demand in action. Point 2 will probably also happen; but only up to a limited amount, because: Point 3, and the others, won't happen. There will not flow more money towards the USD. What happens now is the opposite; China is selling USD's. Again because of the law of supply and demand, this will lead to a drop of the USD rate. If the drop will be too much for the FED's taste they will increase the interest rate (point 2), but only so much that the depreciation will stop.
- RaSoJo 11y ago
  >There will not flow more money towards the USD. What happens now is the opposite; I guess it is an event in the chain. jpollock asks the question in point 6 "That USD->Renminbi sale might result in a drop in USD because there will be more USD around?"
RaSoJo 11y ago
Thanks for this. I look forward to more answers on the questions you highlighted in this thread. One additional question I have now is, what about the impending Fed Rate Hike? As in your point 7 - if the China Govt. action is equivalent to a rate hike, then will the Fed's own hike get pushed further into 2016?

ArikBe 11y ago

China holds US debt treasuries. China sells US debt treasuries in exchange for dollars. China sells the dollars it raised to buy Yuan. Demand for the Yuan increases, hence the Yuan becomes more valuable, hence its exchange rate vis-a-vis the dollar appreciates (it will also appreciate vis-a-vis other currencies). Dollars are being dumped into the market, so the dollar should decrease in value. A more valuable Yuan means that China's currency is more expensive, hence its exports become more expensive (and drop) and its imports become cheaper (and rise). Other people now own US debt, for which they will receive interest payments and a repayment when the debt is due.

RockyMcNuts 11y ago
More like, there is capital flight from China because there are economic problems and yuan devaluation is anticipated. When people liquidate yuan assets and buy overseas assets, they sell yuan to the central bank, buy foreign currency. In order to buy the yuan, China's central bank needs to supply foreign currency. To acquire the foreign currency, they sell foreign assets, e.g. Treasurys. It's not so much they are trying to push the yuan up, as trying to prevent it from falling too precipitously as people sell it. They are accommodating the capital flight by supplying foreign assets, instead of letting the yuan fall sufficiently sharply to the point that would stop capital flight, because investors would no longer expect further depreciation.
- RockyMcNuts 11y ago
  in a nutshell, as hopefully others have explained better... before - yuan is undervalued relative to market-clearing price - central banks sells yuan to prevent it from rising too quickly - selling yuan, it acquires dollars in exchange - it builds currency reserves, invests in Treasuries now - yuan is overvalued relative to market-clearing price - central bank buys yuan to prevent it from falling too quickly - buying yuan, it needs to offer dollars in exchange - it sells Treasurys for dollars, sells off currency reserves
jussij 11y ago
In terms of supply and demand what you say makes sense, but: > China sells the dollars it raised to buy Yuan. The Yuan is a highly controlled currency that does not behave like other normal free market, floating currencies. The Chinese government sets the exchange rate as was shown just weeks ago when they devalued the Yuan and Trump call that move the start of a China/USA currency war. > Demand for the Yuan increases, hence the Yuan becomes more valuable If the Yuan was free floating that might be true, but even then, since China is a net exporting nation they want a low Yuan, so that their exports are cheaper and their imports are more expensive. So why would they want to drive up the Yuan? I'm really not sure what is going on but everything they are doing (i.e. selling US bonds) goes against what one would expect. The only thing I can think of, because of the turmoil in China (i.e. the share market shock, property bubbles etc) they are a bit short of cash and rather than print money (which would causes inflation) they are raising money by selling some of their US bonds.

deleted 11y ago

[deleted]

deleted 11y ago

[deleted]

URSpider94 11y ago

For years, China has been selling its own currency (RMB) and buying USD. This has the effect of depressing the value of RMB vs the dollar, since it puts more RMB into the market and removes dollars. It takes the dollars it owns and buys US Treasury debt. China wanted to keep the RMB artificially low to keep Chinese goods affordable in export markets, which keeps the economy growing. They didn't completely cancel out increases in exchange rate, instead they were managing it to be a slow rise over years. Now that the China economy has started slowing, the RMB has actually started dropping in price vs the dollar. Although good for trade, this is panicking the markets, who expect stability or a slight increase. So, the government is reversing the flow, selling treasuries, selling the dollars, and buying RMB. This is called "unwinding" the position. This unwinding has its own effect on the U.S. markets -- it's going to tend to drive down the price of treasuries, which will INCREASE their effective interest rate. Higher interest rates in the U.S. might threaten the economic recovery -- the Fed has been trying to keep rates low for the past 7 years or so.

gjm11 11y ago
I don't think I believe your last paragraph. It's certainly true that when predicted interest rates go up, existing bonds (which have fixed yields built into them) become less attractive and their prices go down. So it's certainly true that decreasing bond prices can be indicative of higher future interest rates. But if bond prices are decreasing only because the Chinese government is unwinding its position in Treasuries, surely that doesn't apply. Parallel example: Suppose I hold a vast quantity of exotic options that pay off in some rather specific circumstances -- e.g., Apple shares increasing by more than 10% during January 2025. And suppose I have carelessly mismanaged my financial affairs so that these are a large fraction of my assets, and now I need more money. So I start selling off these options. That will reduce their market price, but that doesn't (unlike most movements in the price of such options) indicate that anyone actually thinks Apple shares are now less likely to gain 10% in 2025-01. Perhaps there's some subtle way for these artificially decreasing bond prices to cause higher interest rates in the future? I'm not seeing it, but I'm not an expert in finance or economics...
- URSpider94 11y ago

drcode 11y ago

I can summarize it in one word for you: INFLATION. This will indirectly cause large amounts of US currency to hit the world markets, and the Chinese are going to stop vacuuming up all our excess USD.

benjaminl 11y ago

China has their currency, the renminbi (RMB), pegged to the US dollar. Since the Chinese economy has been weakening and their stock market has been plunging, people have been pulling money out of the renminbi, this has put downward pressure on the renminbi. Now China has acquired vest foreign exchange reserves, mainly in the form of treasury bills, over the years. This was a result of pegging the renminbi to a rate that was artificially to low. Now that people are pulling money out of China, the renminbi might actually be too high. China has had to user its reserves to prop up both the price of its currency and their stock market, to do this they have had to use their foreign exchange reserves. In one estimate, China has already spent $400 billion propping up the stock market and their currency. (http://www.ft.com/intl/cms/s/0/521f9f12-4a56-11e5-b558-8a9722977189.html http://www.ft.com/intl/cms/s/0/521f9f12-4a56-11e5-b558-8a972...) To do this China needs to sell some of it treasury bills. This will have the effect of a minor increasing in the interest rate the federal government has to pay to borrow. While the Federal Reserve has been keeping rates low, it has been signaling for a while that it wants to increase interest rates. So this actually would be in line the Federal Reserve’s monetary policy. In this end the selling of these treasures will have very little effect on the Unites States or the world wide economy. The big worry is that China might be slipping into recession. As the second largest economy, and the generator of most of the world growth, a Chinese recession would be a huge drag on the world wide economy.

AJ007 11y ago
Vote up. It is critical to understand how the balance of payments works with regards to international trade to explain what is going on. We can already see the impact China's slowdown has had in the price of raw materials. The massive drop in luxury goods consumption & Macau gambling revenue has been attributed by the press to Xi Jinping's corruption crackdown. I didn't buy that explanation. It is plausible that the economic engine which carried them for the past 20 years ran out of steam a while ago. Contractions are good, for both public economies and private companies. They force the removal of waste and expose accounting frauds. The big question now is how much of China's economy is dependent on questionable things? Perhaps outright fraud, maybe business models that work only during sustained growth, or just stuff that requires the continued successful implementation of particular government policies (subsidizing interest rates, keeping exchange rates low.)

snake_plissken 11y ago

China's currency and it's exchange rate is managed by The People's Central Bank of China. It is not allowed to freely float in value in response to supply and demand for it. However, it is allowed more up or down each day within a set amount, before the People's Central Bank of China will intervene, and in actuality many times the PBOC just does whatever it wants to do it. Which brings us to a few weeks ago, when overnight the PBOC decided Yuans would be worth about 2% less than the day before. The PBOC also expanded that daily trading band to 4% a day. They did this in an apparent attempt to increase exports, as Chinese goods, on paper, became Cheaper overnight, at least in terms of USD. In response to this, there has been downward pressure on the Yuan and now the PBOC, wary about capital flight among other things, needs to defend the Yuan by selling US Treasuries, for which they get US Dollars, with which they buy Yuan on the open market, decreasing the supply of Yuan available, which puts upward pressure on its value. The biggest ramification, I would say, has to do with interest rates on US Treasuries, which influence all types of other debt instruments such as home loans, and of which China has been a huge buyer over the past decade and a half. The interest rate on a 10 Year Note is dictated by how much demand there is for the note. If a lot of people want the note, you can get away with offering a lower interest rate, but if few people want to buy it, you need to increase the rate to attract more buyers.

Spooky23 11y ago

China is selling US Debt, so more dollars are on the market. Since we've been keeping interest rates at zero for some time for political purposes, we lack a lot of controls (ie. interest rates adjustments) to smooth out whatever fallout takes place. The risk is that rates might go up. That isn't the end of the world, but will have a negative impact on stocks. As a citizen, the impact varies based on your position. If you refinanced your house with a 30-year fixed, you're good. If you're on a interest-only ARM, not good.

dragonwriter 11y ago
> The risk is that rates might go up. That isn't the end of the world, but will have a negative impact on stocks. There are more effects on the general economy than just the negative impact on the stock market (the direct stock market is one of many direct manifestation of the diversion of investment dollars into Treasuries instead of other investments as Treasury yields increase); upward pressure on interest rates -- that is, an increase in the market-clearing cost of financing given the same demand for financing -- means less financing happens, and thus less of the economic activity dependent on that financing happens, and there is a general economic slowdown, job losses, etc.
- Spooky23 11y ago
  Not necessarily a bad thing. You have junky companies like Amazon, for example, on a decade long binge of expansion, whose plans depend on cheap access to capital. Their only way to deliver profit is by achieving near monopoly status. Why are we subsidizing that behavior? We have a government on a spending binge, again fueled by cheap access to capital. How is slowing down that train a bad thing? If you look back historically, we have had plenty of boom cycles without the "record low" rates. It's not the end of the world as we know it.
  - jonknee 11y ago
    > You have junky companies like Amazon, for example, on a decade long binge of expansion, whose plans depend on cheap access to capital. Their only way to deliver profit is by achieving near monopoly status. Why are we subsidizing that behavior? On the other hand, most companies are having a hard time investing in their own businesses and are instead buying their own shares to boost EPS. Companies that spend a lot to expand their business are good for the economy, so Amazon has a leg up on most firms there. > We have a government on a spending binge, again fueled by cheap access to capital. How is slowing down that train a bad thing? The government isn't on a spending binge. We've had a Congress unable to agree on anything so we're stuck under a budget freeze that happened thanks to the 2010 Budget Control Act and its sequester. Soft government spending has actually hurt US GDP and slowed the recovery.

ChuckMcM 11y ago

China informed the US that its going to be selling its treasury notes (for dollars) so that that it can buy back renminbi (its currency) in dollars to increase the value of the renminbi versus the dollar. With any other asset this would be a sort of 'who cares', however the US finances its own government debt by selling treasuries and having two sellers on the market means that you start competing for buyers, and you compete by selling them at a discount (which raises their effective interest rate). What that means then is that even though the Federal Reserve is interested in keeping interest rates down, you can see interest rates of treasuries can be pushed up, and for the US, selling new treasuries to finance the deficit will pay more interest (causing the deficit to be that much worse) and that can also push interest rates up. Bottom line, China did the right thing by letting the US know they are pursuing this strategy in order for the Federal Reserve to continue to manage its own economic policy.