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Summary & Speculation: China sells US treasuries in order to appreciate Yuan relative to USD. Supply of US treasuries on the market increases. Demand for US

Summary & Speculation: China sells US treasuries in order to appreciate Yuan relative to USD. Supply of US treasuries on the market increases. Demand for US treasuries decreases due to concerns over a large enough Chinese sell-off. Demand for US treasuries increases due to uncertainty over the stock market. Net effect on demand is uncertain. Assuming worst-case scenario (for the US) in which supply of US treasuries increases and demand decreases: Yields on US treasuries increase as investors with less demand must be compensated for taking on a riskier and more plentiful asset. Yields rise, and the US government must now service a higher level of debt, pushing the deficit higher. US is forced to re balance spending, stifling growth and economic activity in order to keep debt in line. Bottom line: This probably won't have an effect on US economy as investors need somewhere to park their money that is not the stock market. Also, the scale at which China is selling off treasuries is assumed to be pretty small ($40bn/mo compared to $3.65tn total holdings). Now if China initiated a mass sell-off of all of its US treasuries, there would be huge ramifications. But in its current form, this seems to just be one more way for China to slowly unravel its position in US treasuries while playing with the value of the RMB.

jasonlaramburu 11y ago
How do you draw the bottom line conclusion (no effect on US economy) from the scenario where U.S. growth and economic activity are stifled?
- space_fountain 11y ago
  He's saying that could happen, but it's unlikely
- roymurdock 11y ago
  The worst-case scenario (large drop in demand coupled with large increase in supply of US treasuries) would probably only be triggered if China dumped a lot of treasuries on the market at once. Say, for argument's sake, 50% of their holdings in one week. This would signal US treasury weakness and would flood the market with a ton of extra US treasuries. They are currently selling treasuries off at the rate of ~1% of their total holdings per month. So I assume that fear over an uncertain stock market + investors looking for a good opportunity to pick up cheap US treasuries will provide enough demand to soak up the new supply of treasuries that are trickling into the market.
6stringmerc 11y ago
Yields rise, and the US government must now service a higher level of debt, pushing the deficit higher. US is forced to re balance spending, stifling growth and economic activity in order to keep debt in line. I think one of the expected consequences of such uncertainty is the Federal Reserve fires up the printing presses and dive right in to QE4. Just a thought.
- irln 11y ago
  Given the fed's 4.5 Trillion dollar balance sheet[1] and paying 25 basis points for excess reserves [2] while getting 33 basis points on 1 year or more treasuries [3] I'm not sure I don't see any "US is forced to re balance spending, stifling growth and economic activity in order to keep debt in line." [1] https://research.stlouisfed.org/fred2/series/WALCL https://research.stlouisfed.org/fred2/series/WALCL [2]http://www.federalreserve.gov/monetarypolicy/reqresbalances.htm http://www.federalreserve.gov/monetarypolicy/reqresbalances.... [3]http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield http://www.treasury.gov/resource-center/data-chart-center/in...
dataker 11y ago
Now, what if other countries, especially emerging markets, followed the same pattern? It would probably not be harmless.
- dredmorbius 11y ago
  China's Treasury holdings dwarf all but a few nations, and it's by far the largest holder, excluding Japan which tails only slightly. "Carribean Banking Centers", oil exporters, and Brazil follow, the last with only just over a quarter of China's holdings. Few emerging countries have any significant holdings. http://www.treasury.gov/ticdata/Publish/mfh.txt http://www.treasury.gov/ticdata/Publish/mfh.txt
  - jldugger 11y ago
    Of course, major foreign holders only hold a third of the total Treasuries. US Government agencies actually own another third of the debt, and the US public owns the last third.
Kinnard 11y ago
#bitcoin
JamesBarney 11y ago
Yields rise, and the US government must now service a higher level of debt, pushing the deficit higher. US is forced to re balance spending, stifling growth and economic activity in order to keep debt in line. I'm not sure how this causes yields to rise. The short term interest rate is determined by the FED. If China sells off enough treasuries that the interest rate on them jumps to 1.0% then the FED will probably just buy more treasuries until the interest rate hits the zero lower bound again at 0% interest. This would stimulate the economy.
- ams6110 11y ago
  Bond yields and prices are inversely related. Prices fall, yields rise.
  - dragontamer 11y ago
    Why the hell is this getting downvoted? Are basic bonds beyond the grasp of this forum? High yields are low prices for the bond holders. So when people sell bonds, the price drops, which causes the yield to rise. ams6110 is fully correct here and is stating simple facts of the bond market.
    - leg100 11y ago
      Because it's clear the person he's responding to understood that relationship. If he'd bothered to read all four sentences, it's clear he meant he wasn't sure why yields would rise if the Fed would react by buying bonds.
    - AnimalMuppet 11y ago
      Perhaps it's getting downvoted because it's irrelevant to JamesBarney's point. The Fed (normally) sets (very) short-term rates; the market sets longer rates. But the Fed also can to some degree set longer rates by QE. And, in fact, the Fed can print more money than China can sell dollar-denominated bonds, and therefore the Fed can win the battle - if they want to badly enough.
crpatino 11y ago
I am not sure that 1% per month is small enough to claim that "probably won't have an effect on US economy". If it were a one off event, sure. But at the end of day the question is: for how long can these advances can be sustained? At the very least, this will prevent US to capitalize on world wide instability by taking on more debt. I wonder if that is the purpose of the Chinese.
strasser 11y ago
"US is forced to re balance spending, stifling growth and economic activity in order to keep debt in line." How does the American governments NOT spending money stifle growth?
- dragonwriter 11y ago
  > How does the American governments NOT spending money stifle growth? The same way any other market participant (or set of market participants) not spending the same amount of money reduces growth compared to what it would be if they did. Activity that isn't happening in the economy is directly a reduction in the size of the economy.
- URSpider94 11y ago
  The US government not spending money looks like: -- Hiring freezes, or even furloughs or layoffs -- Delays in capital projects (new buildings, bridges, airports) This means less money in the pockets of employees, as well as less money to contractors, who have less money to pay their employees and suppliers, and so on. If people have less money, then they can't spend as much money, and thus the economy grows less fast, or stops growing.
- exelius 11y ago
  Government spending on capital projects generally causes an increase in economic activity. The government initiates economic activity, which causes companies to hire more workers, invest in new equipment, purchase supplies, etc. That all eventually makes its way into peoples' pockets, where they spend the money and throw it back into the economy. Capital projects tend to have an outsized impact because much of the economic activity required to build them wouldn't be practical to source from outside the US (you would never buy concrete from China, for example). Furthermore, assuming the capital projects filled a gap in the economy, they may make it easier to do business such that companies can operate with reduced costs relative to global competition. That would be a secondary effect from having improved infrastructure, but it would be much longer-lasting than the primary effects.
- ancap 11y ago
  In theory the government would have to reallocate money from something else in order to pay a higher interest rate. Thus they are not really spending any less. In practice the Federal Reserve takes up some of the burden by buying up Treasuries. You're general idea, though, is correct. Government spending is a burden on the economy. It reallocates resources away from the market. The main metric which is supposed to measure the health of an economy, GDP, is faulty in part because it includes government spending.
spinlock 11y ago
What I don't get is how this jives with debasing the Yuan. Won't selling Treasuries create demand for Yuan and drive up the Yuan price? Maybe They are selling Treasuries for another currency?
- exelius 11y ago
  They are probably selling treasuries for dollars and adding them to their foreign currency holdings. Also, China can just print more Yuan if they want to debase it (they're a government; they can do that). Whether they keep the dollars as dollars is dependent on whether or not they think the dollar will rise in value relative to other currencies: it's just investment strategy at that point.
  - spikels 11y ago
    It can't be that since their foreign reserves which include foreign currency holdings are declining. The recent turmoil started with an attempt to lower their currency but this quickly got out of hand when their stock market crashed so they had to start supporting their currency. To do this they sold foreign assets for foreign currency which they used to buy their own currency.
    - exelius 11y ago
      Right; OP was asking why they would be supporting their currency if they were trying to devalue it. And honestly, the "stock market crash" was just a correction. Yes, it declined by 50% over 2 months. But in the 9 months between September 2014 and June 2015 it had risen by over 250% - these most recent losses represent only about half of the total gains over the last year. China is a fast growing economy, and fast growing economies are volatile and prone to asset bubbles. Its economy is less reliant on its stock market than the US; hence the market can slide way, way further out of equilibrium than in the US because it's not as liquid and is only weakly tied to economic fundamentals.
- lmm 11y ago
  It will drive up the price of the Yuan - that's what the grandparent said. I don't know where you're getting debasing from? Separately the Chinese government recently allowed the Yuan to float more openly. That's had the effect of debasing it, but it wasn't a goal - the point is to allow it to float at a market price (partly to make it more viable as a reserve currency), but the government wants to prop up its value.
washedup 11y ago
Great summary.
exelius 11y ago
> Now if China initiated a mass sell-off of all of its US treasuries, there would be huge ramifications. But in its current form, this seems to just be one more way for China to slowly unravel its position in US treasuries while playing with the value of the RMB. Offloading foreign currency holdings in a mass sell-off is not something China would WANT to do -- it would end up destabilizing the Chinese economy more than the US economy. Not even as an economic warfare tactic: the global economy is dependent on cheap US money, and messing with that would set off a global recession that would hit an emerging superpower like China especially hard. I think you're right and China is just looking to rebalance its currency by drawing the dollar down a bit. That's not the worst idea in the world (either for China or for the US) and they're doing it right around the time the Fed was planning to raise rates anyway. I think the market is already spooked enough by the troubles in China that it would probably welcome a rate increase (for the reasons you listed above).
- jsn117 11y ago
  > I think you're right and China is just looking to rebalance its currency by drawing the dollar down a bit. In prep for having the Yuan as a global reserve currency.
  - criley2 11y ago
    >In prep for having the Yuan as a global reserve currency. Actually, we just "denied" their request to be included in the IMF's SDR, and these responses are also interpreted by some as payback.
    - toomuchtodo 11y ago
      If this is payback, why were they kind enough to give us notice? They could've not given us notice and sold far more than they did.
      - criley2 11y ago
        >If this is payback, why were they kind enough to give us notice? They could've not given us notice and sold far more than they did. Because it's the kind of muted, minor payback that two economies that are linked at the hip give each other. China sells like $500B worth of goods to US every year. Rocking the US boat rocks their export boat which rocks the Chinese middle class. Creating economic instability in America would lead to political instability in China, methinks.
yourMILF 11y ago
> This probably won't have an effect on US economy as investors need somewhere to park their money that is not the stock market. Ever tried my app? iOS: https://itunes.apple.com/us/app/gold-price-cafe/id974642838?mt=8 https://itunes.apple.com/us/app/gold-price-cafe/id974642838?... Android: https://play.google.com/store/apps/details?id=air.com.goldpricecafe.mobile https://play.google.com/store/apps/details?id=air.com.goldpr...

jasonlaramburu 11y ago

How do you draw the bottom line conclusion (no effect on US economy) from the scenario where U.S. growth and economic activity are stifled?

space_fountain 11y ago
He's saying that could happen, but it's unlikely
roymurdock 11y ago
The worst-case scenario (large drop in demand coupled with large increase in supply of US treasuries) would probably only be triggered if China dumped a lot of treasuries on the market at once. Say, for argument's sake, 50% of their holdings in one week. This would signal US treasury weakness and would flood the market with a ton of extra US treasuries. They are currently selling treasuries off at the rate of ~1% of their total holdings per month. So I assume that fear over an uncertain stock market + investors looking for a good opportunity to pick up cheap US treasuries will provide enough demand to soak up the new supply of treasuries that are trickling into the market.

6stringmerc 11y ago

Yields rise, and the US government must now service a higher level of debt, pushing the deficit higher. US is forced to re balance spending, stifling growth and economic activity in order to keep debt in line. I think one of the expected consequences of such uncertainty is the Federal Reserve fires up the printing presses and dive right in to QE4. Just a thought.

irln 11y ago
Given the fed's 4.5 Trillion dollar balance sheet[1] and paying 25 basis points for excess reserves [2] while getting 33 basis points on 1 year or more treasuries [3] I'm not sure I don't see any "US is forced to re balance spending, stifling growth and economic activity in order to keep debt in line." [1] https://research.stlouisfed.org/fred2/series/WALCL https://research.stlouisfed.org/fred2/series/WALCL [2]http://www.federalreserve.gov/monetarypolicy/reqresbalances.htm http://www.federalreserve.gov/monetarypolicy/reqresbalances.... [3]http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield http://www.treasury.gov/resource-center/data-chart-center/in...

dataker 11y ago

Now, what if other countries, especially emerging markets, followed the same pattern? It would probably not be harmless.

dredmorbius 11y ago
China's Treasury holdings dwarf all but a few nations, and it's by far the largest holder, excluding Japan which tails only slightly. "Carribean Banking Centers", oil exporters, and Brazil follow, the last with only just over a quarter of China's holdings. Few emerging countries have any significant holdings. http://www.treasury.gov/ticdata/Publish/mfh.txt http://www.treasury.gov/ticdata/Publish/mfh.txt
- jldugger 11y ago
  Of course, major foreign holders only hold a third of the total Treasuries. US Government agencies actually own another third of the debt, and the US public owns the last third.

Kinnard 11y ago

#bitcoin

JamesBarney 11y ago

Yields rise, and the US government must now service a higher level of debt, pushing the deficit higher. US is forced to re balance spending, stifling growth and economic activity in order to keep debt in line. I'm not sure how this causes yields to rise. The short term interest rate is determined by the FED. If China sells off enough treasuries that the interest rate on them jumps to 1.0% then the FED will probably just buy more treasuries until the interest rate hits the zero lower bound again at 0% interest. This would stimulate the economy.

ams6110 11y ago
Bond yields and prices are inversely related. Prices fall, yields rise.
- dragontamer 11y ago
  Why the hell is this getting downvoted? Are basic bonds beyond the grasp of this forum? High yields are low prices for the bond holders. So when people sell bonds, the price drops, which causes the yield to rise. ams6110 is fully correct here and is stating simple facts of the bond market.
  - leg100 11y ago
    Because it's clear the person he's responding to understood that relationship. If he'd bothered to read all four sentences, it's clear he meant he wasn't sure why yields would rise if the Fed would react by buying bonds.
  - AnimalMuppet 11y ago
    Perhaps it's getting downvoted because it's irrelevant to JamesBarney's point. The Fed (normally) sets (very) short-term rates; the market sets longer rates. But the Fed also can to some degree set longer rates by QE. And, in fact, the Fed can print more money than China can sell dollar-denominated bonds, and therefore the Fed can win the battle - if they want to badly enough.

crpatino 11y ago

I am not sure that 1% per month is small enough to claim that "probably won't have an effect on US economy". If it were a one off event, sure. But at the end of day the question is: for how long can these advances can be sustained? At the very least, this will prevent US to capitalize on world wide instability by taking on more debt. I wonder if that is the purpose of the Chinese.

strasser 11y ago

"US is forced to re balance spending, stifling growth and economic activity in order to keep debt in line." How does the American governments NOT spending money stifle growth?

dragonwriter 11y ago
> How does the American governments NOT spending money stifle growth? The same way any other market participant (or set of market participants) not spending the same amount of money reduces growth compared to what it would be if they did. Activity that isn't happening in the economy is directly a reduction in the size of the economy.
URSpider94 11y ago
The US government not spending money looks like: -- Hiring freezes, or even furloughs or layoffs -- Delays in capital projects (new buildings, bridges, airports) This means less money in the pockets of employees, as well as less money to contractors, who have less money to pay their employees and suppliers, and so on. If people have less money, then they can't spend as much money, and thus the economy grows less fast, or stops growing.
exelius 11y ago
Government spending on capital projects generally causes an increase in economic activity. The government initiates economic activity, which causes companies to hire more workers, invest in new equipment, purchase supplies, etc. That all eventually makes its way into peoples' pockets, where they spend the money and throw it back into the economy. Capital projects tend to have an outsized impact because much of the economic activity required to build them wouldn't be practical to source from outside the US (you would never buy concrete from China, for example). Furthermore, assuming the capital projects filled a gap in the economy, they may make it easier to do business such that companies can operate with reduced costs relative to global competition. That would be a secondary effect from having improved infrastructure, but it would be much longer-lasting than the primary effects.
ancap 11y ago
In theory the government would have to reallocate money from something else in order to pay a higher interest rate. Thus they are not really spending any less. In practice the Federal Reserve takes up some of the burden by buying up Treasuries. You're general idea, though, is correct. Government spending is a burden on the economy. It reallocates resources away from the market. The main metric which is supposed to measure the health of an economy, GDP, is faulty in part because it includes government spending.

spinlock 11y ago

What I don't get is how this jives with debasing the Yuan. Won't selling Treasuries create demand for Yuan and drive up the Yuan price? Maybe They are selling Treasuries for another currency?

exelius 11y ago
They are probably selling treasuries for dollars and adding them to their foreign currency holdings. Also, China can just print more Yuan if they want to debase it (they're a government; they can do that). Whether they keep the dollars as dollars is dependent on whether or not they think the dollar will rise in value relative to other currencies: it's just investment strategy at that point.
- spikels 11y ago
  It can't be that since their foreign reserves which include foreign currency holdings are declining. The recent turmoil started with an attempt to lower their currency but this quickly got out of hand when their stock market crashed so they had to start supporting their currency. To do this they sold foreign assets for foreign currency which they used to buy their own currency.
  - exelius 11y ago
    Right; OP was asking why they would be supporting their currency if they were trying to devalue it. And honestly, the "stock market crash" was just a correction. Yes, it declined by 50% over 2 months. But in the 9 months between September 2014 and June 2015 it had risen by over 250% - these most recent losses represent only about half of the total gains over the last year. China is a fast growing economy, and fast growing economies are volatile and prone to asset bubbles. Its economy is less reliant on its stock market than the US; hence the market can slide way, way further out of equilibrium than in the US because it's not as liquid and is only weakly tied to economic fundamentals.
lmm 11y ago
It will drive up the price of the Yuan - that's what the grandparent said. I don't know where you're getting debasing from? Separately the Chinese government recently allowed the Yuan to float more openly. That's had the effect of debasing it, but it wasn't a goal - the point is to allow it to float at a market price (partly to make it more viable as a reserve currency), but the government wants to prop up its value.

washedup 11y ago

Great summary.

exelius 11y ago

> Now if China initiated a mass sell-off of all of its US treasuries, there would be huge ramifications. But in its current form, this seems to just be one more way for China to slowly unravel its position in US treasuries while playing with the value of the RMB. Offloading foreign currency holdings in a mass sell-off is not something China would WANT to do -- it would end up destabilizing the Chinese economy more than the US economy. Not even as an economic warfare tactic: the global economy is dependent on cheap US money, and messing with that would set off a global recession that would hit an emerging superpower like China especially hard. I think you're right and China is just looking to rebalance its currency by drawing the dollar down a bit. That's not the worst idea in the world (either for China or for the US) and they're doing it right around the time the Fed was planning to raise rates anyway. I think the market is already spooked enough by the troubles in China that it would probably welcome a rate increase (for the reasons you listed above).

jsn117 11y ago
> I think you're right and China is just looking to rebalance its currency by drawing the dollar down a bit. In prep for having the Yuan as a global reserve currency.
- criley2 11y ago
  >In prep for having the Yuan as a global reserve currency. Actually, we just "denied" their request to be included in the IMF's SDR, and these responses are also interpreted by some as payback.
  - toomuchtodo 11y ago
    If this is payback, why were they kind enough to give us notice? They could've not given us notice and sold far more than they did.
    - criley2 11y ago
      >If this is payback, why were they kind enough to give us notice? They could've not given us notice and sold far more than they did. Because it's the kind of muted, minor payback that two economies that are linked at the hip give each other. China sells like $500B worth of goods to US every year. Rocking the US boat rocks their export boat which rocks the Chinese middle class. Creating economic instability in America would lead to political instability in China, methinks.

yourMILF 11y ago

> This probably won't have an effect on US economy as investors need somewhere to park their money that is not the stock market. Ever tried my app? iOS: https://itunes.apple.com/us/app/gold-price-cafe/id974642838?mt=8 https://itunes.apple.com/us/app/gold-price-cafe/id974642838?... Android: https://play.google.com/store/apps/details?id=air.com.goldpricecafe.mobile https://play.google.com/store/apps/details?id=air.com.goldpr...