Is China having an illicit affair with the U.S. dollar?
The U.S. Treasury recently released its annual Treasury International Capital (TIC) report on foreign holdings of US assets. The report further validates my assessment in Newsmax nearly 21 months ago (June 8, 2009).
Referring to China’s net holdings of US securities in the TIC data, Reuters reports, “The headline figure of $1.61 trillion is a much more accurate number than the $892 billion.”
The difference, $718 billion, is referenced in the following quote from my Newsmax article of June 8, 2009:
“Last year China purchased $1.05 trillion in U.S. securities. The Council on Foreign Relations reports the Chinese have understated their foreign assets by $700 billion [emphasis mine] from September 2007 through September 2008, indicating a current total of $2.3 trillion (50 percent of GDP).”
In response to the same TIC report, The Examiner stated, “In a startling discovery and an about face from projections from the Obama administration only two weeks ago, the U.S. discovered that China holds 30 percent more of our nation's debt than previously thought.
The other side of the discovery is that Great Britain only holds half [emphasis mine] the amount the Federal government believed it did.”
The aforementioned also comports with the following quote from the same article of mine:
“In addition, from mid-2006 to mid-2007, China purchased U.S. securities through third parties, including the United Kingdom and Hong Kong. [emphasis mine] The Chinese purchases represented 59 percent of U.K. Treasury purchases and 92 percent of agency purchases by the U.K. and Hong Kong combined. From mid-2007 onward, the figures are 12 percent and 56 percent, respectively.”
It seems apparent that the Chinese are attempting to camouflage their purchases of U.S. debt.
For the rational, consider the following.
China’s foreign currency reserves, while officially reported as $2.85 trillion, may be as high as $3.6 trillion, according to Reuters. Reuters also estimates that the quantity of U.S. dollars held by China may range from 58 percent to 72 percent of total foreign currency reserves.
Therefore, the maximum expected value of U.S. dollars held by China is roughly $2.6 trillion.
Moreover, China expects a balance of payments of roughly $400 billion annually (net inflow of U.S. dollars). By the end of 2011, China’s U.S. dollar reserves may approach $3 trillion, while continuing to grow.
This quantity of foreign reserves would be highly inflationary. Therefore, China attempts to remove as much of this supply as possible from their domestic economy. It achieves this by purchasing foreign assets, primarily U.S. Treasury securities.
In the near term, China demands U.S. debt to increase domestic growth with moderate inflation. Conversely, they anticipate less demand for U.S. debt in the long term as they purchase other foreign assets, such as gold, to reduce foreign currency reserve levels.
In the interim, they may camouflage their U.S. debt purchases as part of a geopolitical strategy to enhance their economic, financial, and political standing in the world.
This underlying dynamic portends greater upward pressure on gold prices.
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