What Would Happen If Everyone Joins China In Dumping Treasurys?

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Zero Hedge: “On Tuesday evening in “Devaluation Stunner: China Has Dumped $100 Billion In Treasurys In The Past Two Weeks,” we quantified the cost of China’s near daily open FX operations in support of the yuan.

As BNP’s Mole Hau put it on Monday, “whereas the daily fix was previously used to fix the spot rate, the PBoC now seemingly fixes the spot rate to determine the daily fix, [thus] the role of the market in determining the exchange rate has, if anything, been reduced in the short term.” And a reduced role for the market means a larger role for the PBoC and that, in turn, means burning through more FX reserves to steady the yuan.

Translation and quantification (with the latter coming courtesy of SocGen): as part of China’s devaluation and subsequent attempts to contain said devaluation, China has sold a gargantuan $106 (or more) billion in US paper just as a result of the change in the currency regime.

Notably, that means China has sold as much in Treasurys in the past 2 weeks – over $100 billion – as it has sold in the entire first half of the year.”

Opinion: It is important to follow this gibberish, so let’s start with definitions:

  • The yuan (sign: ¥) is the basic unit of the renminbi, but is also used to refer to the Chinese currency generally.
  • The renminbi is the official currency of the People’s Republic of China. The name literally means “people’s currency.”
  • Soc Gen/Société Générale S.A. is a French multinational banking and financial services company headquartered in Paris.
  • Mole Hau is an economist with the Times of India.
  • FX means foreign exchange or trade of currencies
  • US Treasury is money loaned to the United States in exchange for interest payments.

China is one of the largest holders of US debt. That infusion of capitol is what the US uses to finance its operations after it uses up tax revenues. It is a US credit card.

Since the US dollar is the world reserve currency, it is necessary for nations to own dollars in order to buy commodities like oil, wheat, etc.

By owning US  treasuries, a nation in effect owns dollars. When the largest debt holder manipulates it’s currency and divests itself of dollars, it is a pretty good bet that that nation is planning another method of buying commodities.

And that, my dear Watson is what makes this a problem.

If/when the US dollar loses world reserve status, the dollar will crumble and the new reserve currency will be in demand.

China’s renminbi is not strong enough at this juncture to be the lone reserve currency but it could be included in the Standard Depository Receipt along with the euro and yen basket as a first step to deposing the dollar.

The International Monetary Fund (IMF) meets in October. It will be interesting to see if recent rumors of delaying the decision on the renminbi are accurate.