2014 will be an important year for the US Treasury market. After a $5794.9 billion historic high for the US Treasury market in 2013 speculations as to market demand have increased following news that China will slow down its US debt buying practices. In December China sold off close to $50 billion in US Treasury paper dropping its holding of US debt to $1.27 trillion. The news is significant because Yi Gang an official of PBoC has indicated that China no longer benefits from increasing its foreign reserves. Holdings of US debt have been a way for China to keep the value of the Yuan low and keep export levels high. However China’s exports have been falling consistently over the last couple years and as China develops and wages rise it won’t make sense to keep the value of the yuan too low. If China truly intends to stop purchasing large quantities of US treasury’s that means that the US will have to raise the rates on its debt ceteris paribus. Meaning that the government may turn to increasing taxes to finance expenses.
read more here: China Just Sold Almost 50 Billion in US Treasuries but Don’t Panic Just Yet
3 Comments
That is the issue with development. China profited with its competitive advantage of having huge population willing to work for low wages for cheaper manufacturing compared to competitors. But economic success increases standard of living and the wage that people are willing to work for. With exports decreasing, it is interesting to see how China is changing its strategy. Last semester I looked into to luxury goods market in China. It is the largest in the world; China is home to many of the wealthiest in the world.
See the article on Argentina and others on international flows. If China is selling, who is buying? Note that China ends up with US$ cash instead of bonds, but the total amount of cash versus bonds doesn’t change. But does “China” want cash instead of bonds? If they want to buy RMB, well there has to be someone holding RMB who wants dollars.
This is an interesting article. I thought China wanted to invest in other countries, esp. the U.S. If China is selling, then there must be buyers. Even if China was one of the biggest buyers, if there are buyer then the U.S. treasury does not have to do anything. However, as the prof. mentioned above, who is going to buy? I doubt that there is any in this economic recession, but since we are recovering from the crisis, there must be some people who want to buy it.
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