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So Whats The Deal With China Getting Only T Bonds Why Not Gold Or Oil Or Some Other ..q For That Insighful Eco?

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So Whats The Deal With China Getting Only T Bonds Why Not Gold Or Oil Or Some Other ..q For That Insighful Eco?

Postby Wambleesha » Fri Sep 22, 2017 10:11 am

Any good economist out here who understands the 'game' with China?

China has this huge $ reserve that it will hedge at only against the treasury bonds ( making US debts cheaper but increasing its magnitude year after year ) ....I have some questions on the premise :

Our (USA's ) Ability to repay debt has been downgraded recently. YET it keeps its Treasury bond investment up ...I meant WHY not BUY GOLD instead of Treasury bonds. If it in fact did that , it'd totally flip the US Economy upside down w/ spiraling interest rates, and depressed growth initiating a depression spiral.... So I think ,they are putting all the Dollar bill profits into Treasury bonds...to make US LIFE LONG DEPENDENT ON CHINESE MADE GOODS AND MAKE THE US DEBT INSANELY HIGH ... is that the reason or what other reason could make SENSE FOR THE CHINESE TO PUT MORE DOLLARS into Treasury bills .What are some of the other reasons and how do these weight when compared to Gold.

Also another thing I don't follow is apart from Gold it needs steel , and oil to keep its prod houses running . So WHY are these too not so attractive ?

-- How long do you think this Debt Cycle will continue. Buy more T Bonds to give a bigger loan to a borrower whose credit is not too well standing.

-- At this point of time what'd happen if US Govt put Quotas on Select Chinese goods to encourage competition from local producers

PL No Disdain on Chinese People. This is purely a economic discussion w/ concern to our US Economy
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So Whats The Deal With China Getting Only T Bonds Why Not Gold Or Oil Or Some Other ..q For That Insighful Eco?

Postby Osrick » Fri Sep 22, 2017 10:13 am

There are a couple of angles on this. And NO, it's not some clever ploy by China to make the US dependent.

First, specifically with regard to gold, you may not realize it but there is only a limited supply of gold available. There has only been the equivalent of $7 or $8 trillion worth of gold mined in total, in all of history. If China tried to plow 1 or 2 trillion dollars into the gold market, that would radically affect the market, and gold's price would spike faster than china could buy it. (And then inevitably the bubble would burst and the price would plunge, and they'd lose money).

But, more to the point. China needs to remain in US dollars, because China accumulates a lot of US dollars as a result of running large monthly trade surpluses with the US.

Understand the two prime policy goals of China: 1) maintain a high trade surplus with the US, and 2) keep the Yuan weak versus the US dollar.
Goal #2 supports goal #1 -- an undervalued Yuan keeps Chinese products cheap to Americans ... which in turn encourages Americans to continue to import from China, supporting that trade surplus. If the Yuan appreciates, the US would import less from China. After all the one and only advantage to doing business with China is that their products are cheap. Lose that, and the US doesn't need China any more.

China needs the trade surplus because that represents a big chunk of China's GDP -- which keeps workers employed and happy so they don't hang their communist leaders on lampposts. Losing that trade surplus against the US would significantly hurt the Chinese economy. Chinese leaders want to avoid that at all costs.

So to maintain the surplus, China must keep the Yuan weak versus the dollar.But keep in mind, the surplus brings in massive amounts of US dollars into China. (US buyers pay in dollars from Chinese suppliers). Those dollars mostly work their way into the Chinese banking system and up to the Central bank. As you noted, the Central Bank uses a lot of them to buy US Treasuries, instead of gold, etc. (Also, it's not the job of the central bank to be buying steel or oil or such commodities. Chines COMPANIES do that. A central bank is not a consumer of resources ... it's a manager of the money supply).

Here's the thing: using dollars to buy gold or Euros or anything OTHER than US dollar-based assets is the equivalent of "selling dollars". You sell something, you tend to lower its price. If China dumped all those dollars from the trade surplus, that would devalue the dollar, making the Yuan rise in comparison ... harming the trade surplus. That is contrary to China two main policy goals I mention above. China could only react by BUYING dollars on the foreign exchange markets to boost the dollar's value ... but then, again, China is stuck with dollars.

So, China must remain in dollars. But how? It doesn't want to let cash currency sit idle. You can't just shovel currency into a vault. China must necessarily invest those dollars as a matter of basic cash management.

But they need a market that can absorb $30 billion a month without that distorting the dollar/yen ratio. There is only one realistic possibility: the market for US Treasury bonds, bills, and notes. And that's why China buys them. That's how China keeps all those dollars in "dollar form" without having to convert to another currency.

In short, the addiction we have here is that the Chinese government is addicted to keeping a trade surplus vs. the US -- and that fact explains everything. You give them too much credit to think they are clever schemers. They are desperately terrified of failing to maintain the surplus -- that's their motivation.
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