China Dumps US Asset Backeds and Corporates
February 9th, 2010
By David Goldman
Dollar-denominated risk assets, including asset-backed securities and corporates, are no longer wanted at the State Administration of Foreign Exchange (SAFE), nor at China’s large commercial banks. The Chinese government has ordered its reserve managers to divest itself of riskier securities and hold only Treasuries and US agency debt with an implicit or explicit government guarantee. This already has been communicated to American securities dealers, according to market participants with direct knowledge of the events.
It is not clear whether China’s motive is simple risk aversion in the wake of a sharp widening of corporate and mortgage spreads during the past two weeks, or whether there also is a political dimension. With the expected termination of the Federal Reserve’s special facility to purchase mortgage-backed securities next month, some asset-backed spreads already have blown out, and the Chinese institutions may simply be trying to get out of the way of a widening. There is some speculation that China’s action has to do with the recent deterioration of US-Chinese relations over arm sales to Taiwan and other issues. That would be an unusual action for the Chinese to take–Beijing does not mix investment and strategic policy–and would be hard to substantiate in any event.
Now this sounds like posturing to me. While everyone understands China would like to reduce it's stack of USA denominated assets, dumping them, the "nuclear option" makes absolutely no sense for them as their asset values would be hurt in the process. Like all controlled economies in the world today, they want to see if they can "slowly unwind" this debacle. Which is about like saying we'd like to make an unscheduled landing in an airplane but heck, for a refreshingly blunt take on it, dance on over to Denninger;
Among the salient features of Denninger's subtle approach are that
"Our President can, with the wave of a pen, reduce our outstanding
Federal Debt by a trillion dollars. He can issue an executive order
that declares that every bond the Chinese Government holds is worthless."
Denninger's reasoning is rather simple. I can't believe I just said that but it is a simple point: the PRC can't, by dumping or by military threat, induce us to do much of anything. Not in a big fat hurry anyway not without that old thing called "mutually assured destruction".
And why people keep linking this to Iran is beyond me. This "punch" that's supposed to come, boy they sure got me in suspense.