China has sent several warning shots about the US dollar and US Treasuries. Although Obama has committed to a strong-dollar policy, there is great doubt about how the US will balance the need for fiscal and monetary stimulus with a strong-dollar policy. A precarious balance to say the least.
And with China already shifting from long-dated Treasuries to short-dated Treasuries, the desire to reduce duration exposure to US Treasuries is apparent:
- “I wish to tell the U.S. government: ‘Don’t be complacent and think there isn’t any alternative for China to buy your bills and bonds’” - Yu Yongding, China’s former central bank advisor. “The euro is an alternative. And there are lots of raw materials we can still buy.’’ (Source: Bloomberg)
- China’s Premier Wen Jiabao in March called for the US to “guarantee the safety of China’s assets”. (Source: Bloomberg)
- Central bank governor Zhou Xiaochuan proposed a new global currency in a paper posted to the central bank’s website. (Source: Bloomberg)
Rightly so, China is concerned about US budget deficits, US inflation and a loss in confidence in the US dollar. While the Euro is also the flawed fiat currency of a delicate union, the ECB is more of an inflation hawk and committed to balanced budgets…not necessarily good for the Euro-zone economy, but good for Euro currency investors (at least compared to the US dollar).
Interesting, Yu explicitly mentioned commodities as an alternative. Yes, that includes gold - China recently bought some gold unloaded by the IMF. But that also includes copper, steel, oil, etc…it makes perfect sense for China to divert currency reserves into functional assets needed to promote domestic growth. Furthermore, some of these commodities will be scarce in the near future (e.g. conventional oil) so they make sense to hold as a strategic economic asset.
No doubt, China’s talk is only contributing to the loss in confidence with the US dollar. Regardless, take their lead and get out now. I don’t know how they could make it any clearer.
