Tuesday, August 3, 2010

The Debts of the Lenders: China on the Soapbox Again About US Treasuries

More harsh rhetoric about US fiscal profligacy. Chinese buyers, represented mostly by the state, are growing increasingly vocal in their criticism for the US to follow a European style austerity plan. . . . or else.

“I do not think U.S. Treasuries are safe in the medium-and long-run,” Yu, a
member of the state-backed Chinese Academy of Social Sciences, wrote yesterday
in an e-mailed response to questions. China is unable to sell the securities in
a “big way” and a “scary trajectory” of budget deficits and a growing supply of
U.S. dollars put their value at risk, he said.

“China has to depend more on demand and supply in the foreign exchange
market for the determination of the yuan exchange rate,” Yu wrote. “Only God
knows how much value that China has stored in the U.S. government securities
will be left in the future when China needs to run down its reserves.”

“The U.S. government has strong incentives to reduce its real burden of
debt through inflation and dollar devaluation,” he said. “Whichever way it is,
the yuan-recorded market value of Treasuries will fall, causing huge capital
losses to China’s central bank.”

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