6.9 C
New York
Friday, March 29, 2024

China Promises Not To Use “Nuclear” Option And Buy Gold, Dump US Assets

Courtesy of Tyler Durden

China’s State Administration of Foreign Exchange (SAFE ) is once again making waves, by reminding the world about its trillions in dollar-denominated holdings, and that these could be dumped in a heartbeat. Of course, in tried and true Chinese fashion, it is notifying the world it has no intention of using the “nuclear option” which of course is merely a reminder that the nuclear option not only exists but is certainly at the forefront of any “diplomatic” negotiations with the US. As Reuters reports, “In a series of questions and answers posted on its website, www.safe.gov.cn, SAFE asked rhetorically whether China would use its $2.45 trillion stockpile of reserves, the world’s largest, as a “nuclear weapon.” Apparently, the primary focus of the Q&A was to allay fears that China may be stockpiling gold in the open market: “SAFE was lukewarm about gold as an investment. “It cannot become a main channel for investing our foreign exchange reserves,” the agency said, noting the size of the gold market was limited and prices were volatile. Buying more gold would also not help much in diversifying China’s reserves.” Of course, with all this occurring in light of recent disclosure that the BIS has been involved in gold swaps to provide liquidity to unknown banks, immediately obviates this statement, since, as we have pointed out previously, the Chinese 7 and 30 Day repo markets are still sufficiently strained, and gold would certainly come in useful to allay fears that domestic banks have something beyond massively underwater residential loans on their balance sheets to fund trillions in liabilities. All the Chinese statement really is, is a warning to the US to avoid following the advice of such permaspenders as Krugman, and now Goldman, and to launch into another round of monetary devaluation via QE. We are skeptical that once Bernanke puts the presses into turbo mode once again, that China will theatricize the same kind of wholesome support for US-based assets.

More from Reuters:

“Any increase or decrease in our holdings of U.S. Treasuries is a normal investment operation,” SAFE, the arm of the central bank that manages China’s official currency reserves, said.

It said it constantly adjusts its portfolio to maximize returns, and any changes to its U.S. Treasury portfolio should be seen in that light and not interpreted politically.

“The U.S. Treasury market is the world’s largest government bond market, and U.S. Treasury bonds deliver fair good security, liquidity and market depth with low transaction costs.

“The U.S. Treasury market is a very important market for China,” the agency said.

China held $900.2 billion in U.S. Treasuries at the end of April, according to U.S. Treasury data released on June 15.

Bankers say China’s total holdings of dollar-denominated assets are much greater, accounting for perhaps two-thirds of its reserves.

“We must recognize that any depreciation of the dollar is relative to other countries, and other countries or regions also have this or that problem,” SAFE said.

SAFE is an easy target for domestic critics who question why China has amassed a mountain of reserves instead of investing more at home. The elucidations on its website appear primarily aimed at disarming those critics.

“SAFE will never be a speculator. It mainly seeks to protect the safety of China’s FX reserves and ensure a stable investment return,” it said.

The agency said it was a financial investor and did not seek management control when it made equity investments.
SAFE also gave a qualified vote of confidence to the dollar.

The agency acknowledged that financial markets were very concerned at one point that massive U.S. government borrowing would drive the U.S. currency lower.

But it said economic conditions elsewhere were also a factor in determining the dollar’s trend. The euro zone, for instance, was struggling with high government debt levels.

“We must recognize that any depreciation of the dollar is relative to other countries, and other countries or regions also have this or that problem,” SAFE said.

One of the prime concerns of Chinese Internet commentators is that a long-term decline in the dollar or euro will erode the value of SAFE’s portfolio.

To that end, SAFE called on the United States and other major countries to take “responsible measures” to maintain the value of their currencies. This meant withdrawing monetary stimulus in a reasonable manner and relying less on deficit spending.

Speaking of Chinese equity investments, whatever happened to those demands for extra funding after Chinese investments in US equities had suffered a dramatic loss in the past few months, and someone somewhere over in Beijing was scrambling to prevent a court martial. Surely, this is yet another indication of just how much China “trusts” the US.


1 COMMENT

Subscribe
Notify of
1 Comment
Inline Feedbacks
View all comments

Stay Connected

157,450FansLike
396,312FollowersFollow
2,280SubscribersSubscribe

Latest Articles

1
0
Would love your thoughts, please comment.x
()
x