Thursday, March 12, 2009

China “Worried” - Issues not so veiled threat…

You tell me, does this sound like a threat to you? “If the U.S. can make sure this won’t happen, then China will continue to invest.”

Sounds like one to me.

A lot of thoughts come to mind, like how could we allow a situation to develop where they have or even think they have power over our country? You see, when you owe people money, you are surrendering your FREEDOM and you are ceding your control to those who you owe money. This is why I’ve been harping on the relationship of freedom and security. To be free and secure, you must practice fiscal discipline.

Now, they have a very valid point. Why would they continue to buy our debt if we simply print away the value of the paper they are holding? They shouldn’t and they won’t.

Does that mean that they are playing fairly with their currency? NO, but that doesn’t change or excuse our own misbehavior.

How about the timing of this? I stated publicly on my market threads that I see what looks like suspicious activity in the bond auction world. All of a sudden billions and billions are being bought by “non-dealers.” Who are these people/companies? Why would they be so interested in buying billions in debt when the equity markets are zooming? That’s not the usual. Usually when markets rally, money leaves bonds for equities. Yet, when critical resistance is met, all of the sudden the buying comes pouring in – just in the nick of time to prevent interest rates from rising beyond that “line in the sand.”

Tinfoil? Watch what happens when TLT hits the 101 area, or the TNX reaches the 30.50 or 3.05% level. Yes, it is critical for the economy in this environment to keep these rates that low. How do you think the big banks get to claim to have operational profits? How do home owners get to roll over their mortgages for affordable rates? How do corporations and the Government get to roll over their debts at affordable rates?

When the world is permeated with DEBT, low interest rates are a MUST. Thus, China’s threat has real meaning. Bernanke has openly stated he’s going to do exactly what the Chinese are telling him not to.
China ‘Worried’ Over Safety of U.S. Debt, Wen Says

By Eugene Tang and Tian Ying

March 13 (Bloomberg) -- China, the U.S. government’s largest creditor, is “worried” about its holdings of Treasuries and wants assurances that the investment is safe, Premier Wen Jiabao said.

“We have lent a huge amount of money to the United States,” Wen said at a press briefing in Beijing today after the annual meeting of the legislature. “Of course we are concerned about the safety of our assets. To be honest, I am a little bit worried. I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”

China should seek to “fend off risks” as it diversifies its $1.95 trillion in foreign-exchange reserves and will safeguard its own interests, Wen said. Chinese investors held $696 billion of U.S. Treasuries as of Dec. 31, an increase of 46 percent from the prior year.

Treasuries have dropped this year as President Barack Obama sells record amounts of debt to fund his $787 billion economic stimulus package. Merrill Lynch & Co.’s U.S. Treasury Master index shows the securities declined 0.5 percent last month, after falling 3.1 percent in January, the most since April 2004. The dollar has dropped 17 percent against the yuan since China ended a fixed exchange rate in July 2005.

Treasuries declined, causing the yield on the 10-year U.S. Treasury note to rise 3 basis points to 2.89 percent at 11:49 a.m. in Hong Kong, according to BGCantor Market Data. The yuan was little changed at 6.8380 per dollar. The Shanghai Composite Index of stocks climbed 0.7 percent.

Stable Yuan
“China is worried that the U.S. may solve its problems with the fiscal deficit and banks by printing money, which will stoke inflation,” said Zhao Qingming, a Beijing-based analyst at China Construction Bank Corp., the country’s second-biggest lender. “If the U.S. can make sure this won’t happen, then China will continue to invest.”

U.S. Secretary of State Hillary Clinton urged China, while visiting officials in Beijing on Feb. 22, to continue buying U.S. debt, which she called a “safe investment.” She didn’t press China on its foreign-exchange policy, backing away from January comments by Treasury Secretary Timothy Geithner that the Chinese government manipulates its currency to boost exports.

China will maintain its policy of seeking a stable yuan, even as gains against the euro and Asian currencies hurt the nation’s exporters, Premier Wen said. People’s Bank of China Governor Zhou Xiaochuan pledged last week to maintain yuan stability as investors pull money out of emerging-market assets because of slowing global economic growth.
Independent Policy

While the yuan has weakened 0.2 percent against the dollar this year, there has been a “drastic depreciation” in the euro and Asian currencies that has put a lot of pressure on Chinese exporters, Wen said. The currency has gained 8.6 percent against the euro this year and 6 percent against the Philippine peso.

“Our goal is to maintain a basically stable yuan at a balanced and reasonable level,” Wen said on the final day of the meeting of the National People’s Congress. “At the end of the day, it is our own decision and any other countries can’t press us to depreciate or appreciate our currency.”

Collapsing exports have dragged the economy to its weakest growth in seven years and eliminated the jobs of millions of migrant workers. Wen reaffirmed China’s target of an 8 percent expansion in 2009 as economies from the U.S. to Japan contract, saying the goal was “difficult but possible” to achieve.

Stimulus Plans
China can add “at any time” to 4 trillion yuan ($585 billion) of stimulus measures to revive the world’s third- biggest economy, Wen said. Gross domestic product expanded 6.8 percent in the fourth quarter, compared with 9 percent for all of last year and 13 percent for 2007.

“We have reserved adequate ammunition,” Wen said, adding that the fiscal deficit is under control and the debt level still safe. “At any time, we can introduce new stimulus.”
Yu Yongding, a former adviser to the central bank, said in an interview on Feb. 10 that China should seek guarantees that its U.S. debt holdings won’t be eroded by “reckless policies.” While Wen used the Chinese word for “guarantee” in his answer, it was translated into English as “ensure.”

Delegates of China’s legislative advisory body suggested that the biggest foreign holder of U.S. debt diversify away from Treasuries into more risky assets at the annual meeting that started on March 3.

Jesse Wang, executive vice president of China Investment Corp., said on March 4 that his $200 billion sovereign wealth fund may invest in “undervalued” commodity assets. Zhang Guobao, head of the National Energy Administration, said China should invest more in commodities instead of hoarding the U.S. dollar, the official Xinhua News Agency reported on March 7.

“We have adopted a principle of diversification with our foreign-exchange investments,” said Wen. “So far, our holdings are generally safe. China will mainly use the reserves for outbound investments and trade.”
Interesting times... I hope our officials can do the right thing. Yes, China and the U.S. need each other. People do funny things when it comes to money!