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China Starting to Shift From Dollar
June 23, 2011 | From theTrumpet.com
But why would it be buying European debt when the Continent is supposedly in worse shape than America?
China began diversifying away from the U.S. dollar in earnest earlier this year, reported the Financial Times on Monday.
During the first four months of the year, China’s foreign exchange reserve grew by around $200 billion. Approximately 75 percent of that was invested in non-U.S. dollar assets, Standard Chartered Bank reported.
It appears that China is “finally following through on its policy to diversify its foreign reserve holdings away from the U.S. dollar,” said the bank’s chief China economist, Stephen Green.
Even accounting for possible stealth Chinese purchases through Hong Kong, London and other overseas financial centers, it still appears that China’s purchases have fallen dramatically. However, Green did say that it was possible that it has found some other way to hide some of its purchases.
According to Green, China purchased far more European debt during the first quarter than U.S. debt.
But why would China be lending so much money to Europeans when news headlines suggest the possible demise of the eurozone due to the economic crisis?
First, an investment in America is not the investment in security it once was. U.S. debt levels are already nearing Greek crisis levels. When you include federal, state and municipal debt, U.S. debt loads compared to the size of its economy are at higher levels than many European countries, and may actually be approaching Greek crisis thresholds.
Second, the crisis in Greece and in Europe generally may not be as severe as some media headlines put it. It certainly is severe enough that Greece or other nations may end up defaulting. It is also possible that one or more nations may leave or be forced out of the union. China, however, does not appear to believe that it will be the end of the European project. In fact, China appears to be betting that the crisis in Europe will be resolved and that the debt it purchases over there will rise in value when that happens.
Third, it is also possible that China is using Europe’s time of crisis as an opportunity to extract geopolitical concessions out of debt-deluged Europeans. By providing dearly needed cash, China may hope to negotiate preferential trade deals and further pry open European markets for its goods. In Greece, for example, China is capitalizing on the crisis by snapping up strategic infrastructure. As reported last year, China will undoubtedly invest huge sums of money redeveloping the Greek port of Piraeus, with the goal of turning it into the “Rotterdam of the south.” The port would act like a gateway linking Chinese factories with consumers across Europe and North Africa. China may be inking similar deals with other struggling economies, such as Portugal and Spain.
If China really is deciding to bankroll Europe’s recovery, there will be severe implications for America.
As we wrote in January, “China is already buying Greek bonds, and has announced that it will continue to purchase Spanish issues. China’s $2.5 trillion worth of foreign exchange reserves give it more than enough firepower to completely bail out Greece, Portugal and Spain single-handedly, if it were to sell just a portion of its U.S. treasury holdings.”
So far, China has only slowed its accumulation of U.S. treasuries. But if it were to stop completely, or worse yet, sell even a portion of U.S. treasuries, it could be catastrophic for America. Interest rates would soar. The Federal Reserve would be forced to “print” massive amounts of money to keep the government functioning. Inflation would soar. And it would also herald the end of the dollar as the world’s reserve currency.
It is a nightmare scenario. And it is a tragedy that America has allowed itself to be in this position.
The Bible strongly warns about the dangers of debt: The borrower is servant to the lender. America’s future now largely depends on the actions of its foreign creditors.
June 23, 2011 | From theTrumpet.com
But why would it be buying European debt when the Continent is supposedly in worse shape than America?
China began diversifying away from the U.S. dollar in earnest earlier this year, reported the Financial Times on Monday.
During the first four months of the year, China’s foreign exchange reserve grew by around $200 billion. Approximately 75 percent of that was invested in non-U.S. dollar assets, Standard Chartered Bank reported.
It appears that China is “finally following through on its policy to diversify its foreign reserve holdings away from the U.S. dollar,” said the bank’s chief China economist, Stephen Green.
Even accounting for possible stealth Chinese purchases through Hong Kong, London and other overseas financial centers, it still appears that China’s purchases have fallen dramatically. However, Green did say that it was possible that it has found some other way to hide some of its purchases.
According to Green, China purchased far more European debt during the first quarter than U.S. debt.
But why would China be lending so much money to Europeans when news headlines suggest the possible demise of the eurozone due to the economic crisis?
First, an investment in America is not the investment in security it once was. U.S. debt levels are already nearing Greek crisis levels. When you include federal, state and municipal debt, U.S. debt loads compared to the size of its economy are at higher levels than many European countries, and may actually be approaching Greek crisis thresholds.
Second, the crisis in Greece and in Europe generally may not be as severe as some media headlines put it. It certainly is severe enough that Greece or other nations may end up defaulting. It is also possible that one or more nations may leave or be forced out of the union. China, however, does not appear to believe that it will be the end of the European project. In fact, China appears to be betting that the crisis in Europe will be resolved and that the debt it purchases over there will rise in value when that happens.
Third, it is also possible that China is using Europe’s time of crisis as an opportunity to extract geopolitical concessions out of debt-deluged Europeans. By providing dearly needed cash, China may hope to negotiate preferential trade deals and further pry open European markets for its goods. In Greece, for example, China is capitalizing on the crisis by snapping up strategic infrastructure. As reported last year, China will undoubtedly invest huge sums of money redeveloping the Greek port of Piraeus, with the goal of turning it into the “Rotterdam of the south.” The port would act like a gateway linking Chinese factories with consumers across Europe and North Africa. China may be inking similar deals with other struggling economies, such as Portugal and Spain.
If China really is deciding to bankroll Europe’s recovery, there will be severe implications for America.
As we wrote in January, “China is already buying Greek bonds, and has announced that it will continue to purchase Spanish issues. China’s $2.5 trillion worth of foreign exchange reserves give it more than enough firepower to completely bail out Greece, Portugal and Spain single-handedly, if it were to sell just a portion of its U.S. treasury holdings.”
So far, China has only slowed its accumulation of U.S. treasuries. But if it were to stop completely, or worse yet, sell even a portion of U.S. treasuries, it could be catastrophic for America. Interest rates would soar. The Federal Reserve would be forced to “print” massive amounts of money to keep the government functioning. Inflation would soar. And it would also herald the end of the dollar as the world’s reserve currency.
It is a nightmare scenario. And it is a tragedy that America has allowed itself to be in this position.
The Bible strongly warns about the dangers of debt: The borrower is servant to the lender. America’s future now largely depends on the actions of its foreign creditors.