China to Dump US Dollar as Confidence in Local Market Grows

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A dear reader:

“To the average American, nothing much has changed in the financial world…

“According to ‘Business News’ on PBS, everything is actually OK – there is nothing to worry about. In fact, during the middle of 2008, all problems will be solved. But when will the Chinese ever dump their US treasury debts?”

A good question: when will the Asians get tired of funding America’s US$800 billion annual current account deficit? Of course, we don’t know the answer. By the evidence, they should have already done so.

But the Asians bought US dollar investments for two reasons:

First, because they were safe. They were a good garage in which to park their ‘surplus savings.’ They thought they wouldn’t have to worry about them.

Secondly, they put them in dollars in order to hold the dollar up. As long as the dollar stayed up, Americans could continue to buy beaucoup de stuff from Asian suppliers.

Now, both those reasons are beginning to look a little “so 2006”. The dollar is going down anyway…and their US dollar investments no longer look so safe. Plus, Asians are becoming more confident about their own prospects. Their own financial instruments are becoming more sophisticated. The rate of return on Asian investments is much higher, of course, but Asians are also beginning to see that they can safely invest in their own economies, their own companies, and their own financial instruments.

When will they dump US dollar financial instruments? Sooner or later is our answer.

Bill Bonner
The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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  1. As the $US falls faster it does not seem sensible to park money in US treasury bonds, but the Chinese must spend their dollars, so they will probably choose asset-backed shares instead. Recent article ( http://www.chinaview.cn 2007-09-24 16:23:45 )

    BEIJING, Sept. 24 (Xinhua) — About 35 billion yuan of ten-year special treasury bonds were released on Monday, the second batch of a total 200 billion yuan in treasury bonds to be made available to the general public.

    The Chinese Ministry of Finance launched the first batch of 15-year special treasury bonds valuing 31.97 billion yuan on Sept. 18.

    The ministry said the second batch of bonds, on offer from Sept. 24-26, have an annual yield of 4.46 percent, and will be tradable from Sept. 28 through the national inter-bank bond market and stock markets.

    Another batch of 32-billion-yuan bonds will be issued from Sept. 27 to Oct. 9 and will be tradable from Oct. 12, said the ministry.

    The ministry announced on Sept. 10 that it would issue 200 billion yuan in special treasury bonds as part of a plan to raise 1.55 trillion yuan to fund the country’s new foreign exchange investment firm.

    “The bond selling to the public will help ease liquidity, prevent the economy from overheating and strengthen the macro-control policy,” the ministry said.

    The special treasury bonds will be issued in two groups, with the first 100 billion yuan to be issued this month in three phases, while the sale of the remaining 100 billion yuan is scheduled for the fourth quarter.

    Private investors can trade the bonds through the pilot commercial banks – branches of the Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China and China Construction Bank, said the ministry.

    In June, China’s legislature approved the issuance of 1.55 trillion yuan of special treasury bonds by the Ministry of Finance to buy 200 billion U.S. dollars of the foreign exchange reserve for a state investment firm to better use the country’s huge foreign exchange reserves.

    At the end of August, the ministry issued 600 billion yuan of special treasury bonds targeting the country’s commercial banks with an annual interest rate of 4.3 percent. ( One U.S. dollar equals to 7.51 yuan)

    Reply

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