Yes and no.
The Chinese do not have an announced peg on their currency like the Swiss did. Accordingly, they can move very slowly if they see the need to sell their hoard of Treasuries. Schiff seems to think that this may happen suddenly, creating severe dislocation in the short term. I think this would be very counterproductive for the Chinese, especially at a time when US interest rates are very low and the USD is strong. It would seem that the best thing for the Chinese to do, at least for the short term, is to sit on their USTs. If they feel the need to sell, I would be surprised if they would do so in any kind of substantial manner. They were reminded last week of how far-reaching the implications of doing so can be.
The dollar is on a long term downwards trend and is likely to continue that trend. At some point, it will make sense for the Chinese not to hold too much of any one currency. But I don't think that day is coming anytime soon.
The problem for the Chinese should they sell the USD is that the yuan will go higher, hurting their export business. But it also seems like they might be in a 'next phase' cycle in which instead of focusing on exports, they may wish to take a stronger yuan abroad and buy businesses and other assets. You might recall that they Japanese did that in the '80s. It didn't turn out too well, and I am sure the Chinese are studying the Japanese experience so as to avoid it should they decide to do what the Japanese did back then.
The Chinese do have a serious problem: debt. This plagues the world but China has more than its share. Debt is going to slow things down considerably.
I'm quoting something I think pithily gets to the heart of where we are globally:
"Contrary to widely held beliefs, the world has not yet begun to delever and the global debt-to-GDP is still growing, breaking new highs." Further, it is a "poisonous combination" when world growth and inflation are lower than expected and debt is rising. "Deleveraging and slower nominal growth are in many cases interacting in a vicious loop, with the latter making the deleveraging process harder and the former exacerbating the economic slowdown."
hoisingtonmgt.com
The authors believe that we will have a very long period of low interest rates, and I agree with them. The US is not immune to the slowdown, but it is definitely in the best position to weather the storm. That being the case, the USD should continue to be strong and challenge and even reverse - for the time this cycle lasts, which might be a very long time - its downward trend. So long as the USD is strong and low US interest rates prevail (the 30 year UST printed the lowest yield ever on Thursday), there is little to convince me that the Chinese are going to pull the plug on the USD, and certainly not anytime soon. |
