Chimerica Is Starting to Break Up

Includes: CNY, CYB, TBT, TLT, UDN, UUP
by: Washington

In a command economy, the government decides what numbers it wants, and then instructs its economists and government agencies to arrive at those numbers.

If they don't, they're killed or thrown into prison.

So when China's official daily newspaper - China Daily - writes that China will probably run a trade DEFICIT in March, it is hard to know if it is real.

Indeed, it seems suspicious that China Daily linked the deficit in the same opening sentence with America's threats to label China a currency manipulator:

The country will probably see a "record trade deficit" in March thanks to surging imports, Minister of Commerce Chen Deming said on Sunday, while warning that Beijing will "fight back" if Washington labels China a currency manipulator. Speaking at the three-day China Development Forum that ends on Monday, Chen said: "I believe there will be a trade deficit in March" - which will be the first since May 2004.

And this comes hot on the heels of tremendous pressure from both the House and Senate on China to revalue its currency.

So it is tempting to assume that this is just a blunt effort to get the U.S. to back down on its efforts to revalue the Yuan.

However, as Société Générale's Albert Edwards wrote on March 2nd (via Zero Hedge):

Clearly to the extent that the rise in China's official reserves depended on the size of its trade deficit, there will be reduced purchases of US Treasuries. But China has, in part, merely been swapping official dollar purchases of US Treasuries with surging imports of dollar-denominated commodities on the trade account (see chart below).

In other words, China's huge purchases of commodities from Australia, Brazil and elsewhere have overtaken exports.

So it looks like the trade deficit might be real.

But even if it isn't, it shows that the entire environment everyone assumes we are operating in - China as the giant net exporter with huge trade surpluses - might not continue for much longer. In other words, "Chimerica" is starting to break up.

And those huge Chinese purchase of U.S. treasuries are no longer guaranteed.

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