Yesterday, there were cheery reports about how China’s sovereign wealth funds were busy snapping up US-listed equities, buying huge chunks of blue chip America, such as Apple, Coca Cola and so on.
Today, however, the coin has flipped, once again, to bearish thoughts about China dumping its US assets, whether equities or Treasuries.
Allegedly, the State Administration of Foreign Exchange has ordered its foreign exchange reserve managers to dump risky securities and hold only US government debt that carries an explicit guarantee.
According to the currency analysts at BNP Paribas, the rumour is true and dealers have been alerted to China’s intentions. They add that there is a political dimension to the command – the Chinese military is apparently miffed at the decision by the US to sell arms to Taiwan and has urged SAFE to dump US bonds and use the money to boost Chinese defense spending.
The markets are a-flutter, but it’s worth pointing to the enormous hole in the thinking of those army chiefs at the PLA.
The fact is, as economists keep pointing out, the relationship between China and the US is not one-sided. China has to keep buying US debt. It has no other option, and it certainly cannot sell those bonds.
How so? Well, China exports a large quantity of goods to the US. Today’s figures show that exports rose by 21 per cent in January, compared to last year, although the stats were slightly skewed by the lateness of Chinese New Year this year.
China gets paid for those goods in dollars. That money cannot be converted back into renminbi and spent at home. Why? Because exchanging so many dollars for yuan would cause China’s currency to soar, and that, in turn, would collapse its exports.
So if China wants to keep exporting, it is going to have a mountain of dollars. It may decide to switch that money out of equities and into Treasuries, and vice versa, but there’s not a lot else it can do with it.
Even if China wanted to diversify away from dollars, it cannot. The sums are so great that if they, for example, switched the dollars into yen or euros, it would cause those currencies to soar and in turn destroy the economies of Japan and Europe, which would, in turn, make the currencies a bad investment.
China’s trade surplus may be shrinking, and its domestic market growing, but for the umpteenth time, can we quash the rumour that China is going to threaten the US by dumping its dollar holdings.