Tags: Donald Trump | China | debt | Treasurys

Trump May Lead China to Weigh Selling Off Holdings of US Federal Debt

Image: Trump May Lead China to Weigh Selling Off Holdings of US Federal Debt

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Monday, 12 Dec 2016 06:43 AM Current | Bio | Archive

President-elect Donald Trump told Fox News “I don’t know why we have to be bound by a One China policy unless we make a deal with China having to do with other things, including trade.”

Trump also argued that China was "not co-operating with the U.S. on its handling of its currency."

Before becoming President elect, Trump was a business person who knew a rather fair amount about leverage. As such, I don’t think it’s an overstatement saying that it must be presumed that he knows how to handle important creditors.

So, this weekend saw Trump abandon his traditional communication medium of twitter and moved to television where he suggested that the “one China policy” that has been the main stay of the People’s Republic of China’s international relations, could now be a bargaining chip in negotiations with the People’s Republic in the future.

Maybe it could be helpful for investors to recall that the “One-China policy” refers to the policy or view that there is only one state called “China,” despite the existence of two governments that claim to be “China.”

As a policy, this means that countries seeking diplomatic relations with the People's Republic of China (PRC, Mainland China) must break official relations with the Republic of China (ROC, Taiwan) and vice versa.

The risk now is of course that the People’s Republic of China starts to look at its bargaining chips and its role in propping up both the U.S. Treasury market and the dollar could be called into question.

Please take care, central banks are not like other investors and the “paper losses” that might be incurred were China to sell some of its U.S. Treasurys could be considered an acceptable price to them if the U.S., its largest creditor, wishes to leverage its position in order to achieve diplomatic ends in a bargaining negotiation.

Understanding the economic consequences of changing geopolitics of the two super-powers that are the U.S. and China is extremely difficult.

Therefore, let’s not fool ourselves and accept the fact that there is another big uncertainty that has been aggregated to the already way too long list of uncertainties’ list investors have to try to cope with.

No doubt, 2017 has a serious potential for sizable negative surprises.

In this context, and talking about the continuous showing of extreme resilience of the markets at the moment, it might be helpful to take a look at the latest CNN Money Fear & Greed index that, by the way, continuous to rise, which is in the wrong direction, and that was up again to 87, which means in understandable English that markets still don’t seem to get it they are playing with fire…

Generally, these circumstances forebode an increasing probability of a sizable correction. For comparison, one month ago, the index stood at 42 and one year ago, the index stood at 26.

Meanwhile, in the oil market things seem to be stirring again. Saudi Arabia is signaling that it is prepared to cut its production, quote, ‘substantially’ with the aim of being below the production targets. Crude oil jumped on the news and WTI trades at the moment around $54 per barrel.

Finally, Italy has nominated a new prime minister - Foreign Secretary Gentiloni is up for the job which shows undoubtfully that Italian politics face real urgency as the European Central Bank (ECB) has refused to give the bank Monti dei Paschi extra time to raise capital for a 5 billion euro ($5.3 billion) rescue plan.

Investors could do well keeping in mind that a failure of the bank Monti dei Paschi di Sienna could:

  • Erase the savings of thousands of retail investors
  • Jolt the wider Italian banking sector and, last but not least
  • Spark a financial crisis in the euro zone's third-biggest economy

Of course, we aren’t there yet.

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President-elect Donald Trump told Fox News "I don't know why we have to be bound by a One China policy unless we make a deal with China having to do with other things, including trade.
Donald Trump, China, debt, Treasurys
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2016-43-12
Monday, 12 Dec 2016 06:43 AM
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