How Chinese Dumping of US Treasury will Affect MARKETS?

August 27, 15

How Chinese Dumping of US Treasury will Affect MARKETS?

Greetings from Hitesh! Today I am going to deal with very DRY subject from Normal Investor’s point of view. However, try to understand –it will help you in your investment knowledge. As usual, I have tried to keep it as simple as possible, for the benefit of NORMAL GUY. So, enjoy reading.

What happens when you sell your ASSETS or SHARES?

Simple “I will get my money”, you would say. You are 100% right. Now let us take one more step – what happens when you sell your shares or assets in USA?

You will get your payment in USD. So, you need to convert that USD in INR to get the money in INDIA. Simple. When you convert your USD into INR – you are SELLING USD and BUYING INR. Understood?

Now next step….

When you sell USD – price of USD goes down ( as supply increases) and price of INR goes up ( as demand increases).

What is TRESURY BOND?

China exports more than it imports from USA. So it has surplus with USA. USA issues CHINA a Govt backed bond to pay in future date. Till USA pays it – china gets the interest on the same. In normal parlance it is Chinese Fixed Deposit with USA. All have varied interested rates and varied maturity of 1 year to 30 years.

What Happens When CHINESE GOVT Sells them or redeem them?

It means china is drawing from its Reserves to buy Goods / Services or Assets outside CHINA. (same as you are breaking your FD to buy GOODS – means money is going out of your pocket and goes to somebody’s pocket!!)

When Chinese companies change their yuan for dollars (from the PBOC) to import goods or buy services from the United States, those dollars are earned back into the U.S. economy. When they buy existing assets (like a home or a factory) in the United States, the American seller gets the dollars. When they invest in new assets (like opening a new factory), the dollars go to pay contractors, suppliers, and workers, creating new demand in the United States. In each case, the dollars that exit U.S. Treasurys don’t disappear, they just change hands.

The impact on the U.S. Treasury market depends on what the new recipients choose to do with their dollars. If they invest in U.S. Treasury, virtually nothing has changed; total demand for Treasurys remains the same, as do interest rates.

If Americans don’t put those dollars from China back into the Treasury market, they may choose to spend them or invest them in ways they hope will earn a higher return. Then, assuming the Federal Reserve refrains from replacing those dollars by injecting more into the economy, U.S. interest rates will tend to rise — but for good reasons, not bad.

Now let us go Further?

China holds USD 4 trillion in Treasury. It means this money is lying outside china and it is affecting standard of living of Chinese people!! China is getting very low interest on the same. If China brings down this money to CHINA and invest in economy – it can run fast in economic growth.

For US this is a liability. They have to pay the interest on them. If China spends this money – US will also get some business and its productivity will improve.

So, What is The GAME?

China sold US treasury worth USD 100 bln in just 2 weeks prior to 11^th August 2015, when it devalued YUAN.

It bought the GOLD against it. So, USA sold GOLD and got money back. USA has now money to use it for productive purpose.

To protect the USA interest – they would have asked PBOC to devalue the YUAN – so US companies can have more YUAN and US could cover up for the GOLD it sold!!

When more and more Supply of USD comes – USD goes down relatively and rates on Treasury goes up – so China also benefit by holding balance treasuries.

In short this is a WIN - WIN for both as money lying in BANK is being used for some productive purpose. If this goes on successfully – FED may not have to increase the RATES directly!!

(Assume that you have Rs.1 cr in saving account and you are removing it and putting Rs.10 lakh in your business – you will definitely earn more than meager 4% interest our banks gives us on SAVING account! Slowly you will remove more and more money and put it into business. Good for you in long term.)

What Next?

We are too small to understand the games of big guys. However, as and when we get glimpses of the same – we keep on sharing with you.

This article is a part of our mission to educate normal investors about the world of economics and finance. If you like it – do share with your friends. If you also want to know about particular events like this – you can send your request – I will cover it as and when I find time.

Wish you all a Very Happy Thursday.

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Hitesh Parikh