India’s Sell-Off of US Treasuries Proves That China’s Simultaneous Sell-Off is Not Ideologically Motivated

While the heavily indebted US economy relies on sovereign states to purchase American debt, the inflationary spirals that have appeared throughout small, medium and large emerging markets as a direct result of Washington’s policies have led to the phenomenon of both US partners and rivals simultaneously selling off their holdings of US debt in order to boost the value of national currencies. A combination of interest rate hikes from the Federal Reserve, the end of the Obama era quantitative easing policy which effectively meant printing a surplus of Dollars and negative speculation against currencies whose nations are or may soon be victims of the tariffs and sanctions fuelled Trump trade war, have led the value of the Dollar to rise while currencies throughout Asia, Africa and Latin America have seen their value simultaneously decline.

These realities combined with the fact that many nations are now looking to dump US Treasuries before the Dollar’s value itself declines have led Japan, China, Turkey, Russia and now India to being selling off some of their existing holdings of American debt. The fact that a long time partner like Japan, a newly cultivated US partner like India, a long time US friend with currently strained relations like Turkey and America’s superpower “rivals” China and Russia have all engaged in the same practice, demonstrates that the core factors for the sell-offs are more financially driven than ideologically or geo-strategically motivated.

While declining values in national currencies tend to lead to an export friendly environment, there is a clear limit to just how far any nation is willing to see its currency depreciate due to the vast domestic pressure inherent in the price inflation of ordinary goods. Because of this, the trend of treasury dumping while not as dramatic as some have suggested, nevertheless points to the fact that vastly different nations are looking to strengthen their currencies at a time when the Dollar is strong yet geopolitically unstable due to the sanctions-happy policies of Trump’s White House.

While in the long term, this may cause the Dollar to weaken, seeing as Donald Trump has actively criticised the Federal Reserve for its rate hikes, in the short term Trump may not see the global sell-off of US treasuries as a negative development. In the long term however, the move does signal the beginning of a wider trend towards de-dollarisation which will irreversibly alter the position of the US economy in a globalised world for the remainder of the 21st century. What’s more is that as countries as different and as historically (and currently) antagonistic as India and China each decide to take similar moves in respect of US debt dumping, there is little pressure the US can apply in such situations without risking further alienating China and forcing India to re-think its dramatic pivot towards a partnership with the United States. An knock-on effect of this trend may be to foster further hostility between Trump and the nominally independent Federal Reserve over the medium term.

To understand the wider long term context of the global sell-off of US Treasuries, one should study China’s own long term strategy regarding monetary issues. Below is Eurasia Future’s full report on China’s monetary policy and its impact on global markets

What China’s partners want

While the Chinese Renminbi is frequently mentioned when discussing de-dollarisation throughout Asia and Latin America, the fact of the matter is that China’s interests in de-dollarisation are primarily motivated by the desires of Beijing’s trading partners rather than by Beijing itself. This is certainly the case in the short term.

Many of China’s important trading partners have found that the combination of sanctions, tariffs and Dollar-debt that has been subject to inflationary trends as emerging market currencies fair poorly against a robust Dollar, has led to a a conclusion that the Dollar should be phased out as a major trading a reserve currency. Naturally this is easier said than done as the Dollar remains a great equaliser in the global market (as any traditionally easily convertible and generally stable currency would be). That being said, the impetus to ditch a strong but unreliable/weaponised Dollar has motivated nations as diverse as Russia, Turkey, Iran, Venezuela to begin the process of shifting towards transactions either in combinations of national currencies, existing currency baskets, Euros or Renminbi.

For many countries, de-dollarisation remains attractive due to the fact that sanctions and tariffs have detached many nations from US based financial institutions and the US market, respectively. Likewise, such nations are looking to take out loans (and thus accrue debt) in a currency that allows for easier repayments when compared to the USD. Of course any such currency would need to be as convertible and reliable (in terms of value) as the less weapoinsed Dollar of yesteryear.

What China wants 

China is naturally happy to accommodate those nations that seek alternatives to the Dollar. As such, Renminbi is becoming ever more convertible while Shanghai’s financial markets are becoming ever more open to the wider world. The arrival this year of the so-called petroyuan (Renminbi denominated oil futures contracts) further signals that China is both reaching out to heavily sanctioned petro-partners like Iran and Venezuela but also that Beijing’s policy markers are preparing for the inevitable period when as the world’s soon to be largest overall economy, China’s currency will automatically become the global reserve currency as is typically the case in respect of any global power from the Roman to the British Empires.

But while China is happy to accommodate its partners in ditching bilateral Dollar transactions for a combination of local currencies or currency baskets, China itself is not in a hurry to ditch the Dollar. Instead, China has taken and continues to take a gradualist approach whereby monetary policy is more concerned with mitigating the effects of the Dollar’s politicised weaponisation without allowing the US to force China off the Dollar as is de-facto happening with Russia, Venezuela, Iran, Turkey (to some extent) as well as countries that have already decided to move towards Euros for such transactions.

If China were to engage in a mass sell-off of its still substantial holdings of US Treasury debt and then allow Renminbi to freely float, China might find itself in a position similar to that of Japan whose currency appreciated exponentially after Tokyo’s western partners forced Japanese leaders to sign the Plaza Accords in 1985. The result was an overvalued assets market that all came crashing down at the beginning of the 1990s.

As a nation with the world’s largest internal market and highest purchasing power parity (PPP) China already has a ‘golden safety net’ at its disposal that Japan did not have in the 1980s and 1990s. That being said, it remains advantageous for China to trade in Dollars so long as access to the US market remains. Right now, even in spite of tariffs, China’s trade surplus in the first three quarters of 2018 has actually go up compared with figures from 2017, thus vindicating China’s slow and steady policy. Furthermore, the fact that China still conducts most of its trade in the American currency puts a natural stop gag on some of the more ludicrous tariffs policies often threatened by Washington.
The reason therefore that China has recently sold off some of its US debt is because this helps to counter domestic inflationary trends which themselves have been caused by a combination of trade war derived speculation and the comparatively high interest rates set by the US Federal Reserve. As both the US Treasury Department (controlled by the White House) and the Federal Reserve that has been criticised by Donald Trump in recent days have effectively used currency manipulation tools to depress the values of currencies throughout Asia, Africa and Latin America, China’s best option to equalise this is to sell off just enough US debt to keep Renminbi stable, but not enough to heighten Renminbi’s value so as to make Chinese goods more expensive for US consumers (with or without tariffs).

This approach has allowed China to continue to increase its trade with the US in spite of the trade war and the speculation that accompanies the trade war.

Conclusion 

China is clearly keeping as many options open in terms of monetary arrangements as possible. That being said, China prefers to keep its currency on the existing managed float mechanism even though a freely floating Renminbi and Euro style convertibility arrangements would make Renminbi more attractive as a reserve and trading currency in the short term. So long as the US exists as a major foreign market that is utterly reliant on Chinese goods (no matter what Trump says to the contrary), it behoves China to make sure that its domestic currency is neither overvalued like the Japanese Yen of the late 1980s, no undervalued as the US ironically accuses the Chinese currency of already being.

In this sense, every nation with a central bank and/or powerful Treasury department manipulates its currency in line with both domestic and international trends. The ironic element is that while the Trump administration as well as the Federal Reserve are both manipulating (aka weaponising) the Dollar, China is pursuing a middle way which does not threaten the Dollar in the short term while simultaneously taking steps to help its partners break away from a Dollar that for them is less and less of a prudent means of exchange due to America’s eventually self-defeating game of currency manipulation.

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