Chinese Dollar Torture


Recently, the US Treasury Department released data showing an 11% decline in official Chinese holdings of US government bonds during the past year. For US dollar holders, this is a troubling trend. Not so much for those holding gold.

To put it simply, the Chinese government isn’t adding to its US bond position, at least not in any meaningful way. Nor is it rolling over its previous purchases.

According to the latest Treasury International Capital report, China resumed net purchases in July for the first time in three months. China’s US Treasury holdings rose $3 billion. Dollar bulls looking to cheer the modest purchase may first consider the following, longer-term trend: Between September 2009-July 2010, Chinese holdings of US bonds fell from $938.1 billion to $846.7 billion, a drop of over $91 billion over nine months.

In short, the Chinese are backing away from US debt. They’re reducing their exposure to the US dollar, and by extension their vulnerability to a declining US economy.

What’s going on? Is the decline in Chinese holdings of US bonds strictly an economic assessment? Or is there something else afoot? What factions are driving this decision? And what does all of this mean for precious metals?

First let’s note how, in recent years, China has exhibited a newfound measure of international confidence, if not swagger. It’s easy to understand why.

China’s leaders see that the US suffers from a weak economy, hampered by chronic overspending on consumption and underinvestment in new capital. In the wake of the global financial crisis of the past few years, Chinese leaders have concluded that US-style democracy and Wall Street-style capitalism are discredited.

In other words, to use a Chinese term, the US is a “sunset power.” China, on the other hand, sees itself as a “sunrise power.” The Chinese are going places in this world. The Chinese have developed a different approach to development than other nations, and they have the economic statistics to back it up.

The Chinese are not afraid to trumpet their success, either. Recently, for example, the German magazine Der Spiegel noted, “All around the world, from Africa to Asia to South America, Beijing is trying to tout its model of authoritarian state capitalism as the better alternative.”

One way to look at things is that we’re watching historical waves unfold. China is on the rise, while US power and influence wanes. But in a nation and culture as complex as that of China, it’s also useful to take a close look at how and why things happen.

One key source of influence within China is a hard-core military faction. The Chinese military offers a viewpoint that almost always holds sway on issues of supreme national importance. Such issues definitely include areas of so-called “core Chinese interests” that cover Taiwan and Tibet, as well as the South China Sea and the Yellow Sea.

It’s common knowledge, for example, that Chinese military advisers are incensed over US arms sales to Taiwan. No amount of US diplomacy ever is enough to smooth the troubled waters that divide mainland China from Taiwan. Indeed, the Chinese view their relations with Taiwan as an “internal matter” and consider most US activities that touch on that relationship as “officious meddling.”

In a new development this summer, the Chinese military expressed outrage over joint US-South Korean military maneuvers in the Yellow Sea.

That is, the US and South Korea announced plans to conduct military exercises in the waters west of South Korea where a South Korean warship was sunk – apparently by a North Korean torpedo – in March of this year. The Chinese military, in turn, went ballistic (so to speak).

One recent article on the state-run Xinhua news website warned the US not to move the aircraft carrier USS George Washington into the Yellow Sea. The author of the article took care in his choice of words, but left no room for doubt about the Chinese position:

Offending Chinese people is not in the fundamental interest of the US. Any activity aimed at pushing a country with a 1.3-billion populace with enormous potential would be inadvisable.

On another news site, People’s Liberation Army Daily, Rear Admiral Yang Yi, former head of strategic studies at the Peoples’ Liberation Army’s National Defense University, was no less forceful, stating:

On the one hand, [the US] wants China to play a role in regional security issues. On the other hand, it is engaging in an increasingly tight encirclement of China and constantly challenging China’s core interests.

Adm. Yang believes that the US threatens China. Earlier this year, he said:

The US is the only country capable of threatening China’s national security interests in an all-round way… Japan has no such ability, while Russia has no such motivation and India is more worried about China.

In a recent editorial, Adm. Yang expressed dismay over US policies, stating, “Rarely has there been such wavering and chaos in US policy toward China.” Adm. Yang expanded the point in another article in China Daily, China’s main English-language newspaper: “Washington will inevitably pay a costly price for its muddled decision.”

Not to be outdone – or perhaps simply to offer a consistent message – Maj. Gen. Luo Yuan, deputy secretary-general of the People’s Liberation Army Academy of Military Sciences, added his authority to the discussion. In a scathing editorial in the Chinese newspaper Global Times, Gen. Luo said that moving the USS George Washington into the Yellow Sea was a “deliberate provocation” toward China and that the US should “think twice about the maneuver.”

Gen. Luo followed up with this comment: “Imagine what the consequences will be if China’s biggest debtor nation challenges its creditor nation.” China is the “world’s largest market,” and “offending China means losing, or at least decreasing, market share.”

I don’t think we have to “imagine” the consequences at all. I believe we just have to look at the decline in Chinese holdings of US bonds – or “decreasing market share,” like the man said.

Thus, I believe that in addition to the Chinese economic concerns about the future of the US economy and US dollar, the Chinese military is also pushing its leadership to back away from holding US dollars. There’s a component of military strategy to the decline in Chinese bond holdings.

Then next question is if the Chinese are NOT buying US bonds, then who IS buying them?

My hunch is that it’s the US Federal Reserve. That is, the Fed is covering China’s retreat from the dollar. For reasons both economic and military, China is gradually exiting is dollar position. The Fed is allowing this to happen quietly, without causing a dollar panic.

Meanwhile, the consequence is that the Fed is monetizing the US national debt. Over the long term, this can only lead to the further decline of the U.S currency. Looking out over the medium and long terms, it can only mean higher prices for precious metals.

And that, for our money, is exactly where the sunrise investors will want to be.


Byron King,
for The Daily Reckoning Australia

Byron King
Byron King currently serves as an attorney in Pittsburgh, Pennsylvania. He received his Juris Doctor from the University of Pittsburgh School of Law in 1981 and is a cum laude graduate of Harvard University. Byron is also co-editor of Outstanding Investments.


  1. Byron,

    Finally, someone thinking outside of convetional wisdom insofar as Chinese holdings of U.S. debt is concerned. I have heard the explanation many times that suggested a Chinese withdrawal from U.S. bonds would triiger a dollar and bond market collapse. With accompanying interest rate spikes crushing the U.S. economy. My question to them was ‘what if the fed bought out the Chinese holdings?’ ‘Preposterous’ was the standard reply ‘that would flood the markets with dollars and instigate a precipitous fall in the dollar’. What a disaster, eliminating the Chinese sword of damocles while concurrently providing a major boost to U.S. exporters! The affect on the rest of the world may be less than positive, but that never stopped the Yanks before.

    David Graham
    September 20, 2010
  2. Hi

    Geez, you talk and believe JUST LIKE Bill Bonner. Hmmm. Author, you DO see the pyramid scheme symbol on the back of the USA one dollar bill, right? You DO see the servitude infestation in capitalism, right? And do you see the “pay up or lose your wellbeing” Chicago mob-like felony extortion widespread within capitalism? Do you see the “join or starve” felony extortion done to the 18 year olds… by this ugly competer’s church called capitalism? See how forcing competer’s religions onto 18 year olds… kills membership in the cooperator’s church (Christianity/socialism)?? Do you understand that AmWay (American Way) (New World Order) got “the exclusive” (legal tender) on the TYPE of survival coupons (money) accepted in supply depots (stores) and leverages 18 year olds into the organization via that felony activity as well? (It puts AmWay-coupon slaving requirements called price tags… on all the survival goods). Do you understand how farmyard pyramids work… from your childhood?? Remember?? Upper 1/3 are “heads in the clouds” while the kids on the bottom ALWAYS GET HURT from the weight of the world’s knees in their backs? Still with me? Do you see anything illegal, immoral, or just plain sick… in any of this pyramid scheme’s activities?

    Us American Christian socialists are still patiently awaiting the natural fall of the pyramid-o-servitude, or the busting of the free marketeers felony… by the USA Dept of Justice. Us Christians are VERY CLOSE to issuing a cease and desist order until the servitude and inequality goes away… which means it turns into a commune. Commune is a word we LOVE when used in the word “community”… but its one the caps HATE when used in the term “commune-ism”. Go fig. PROGRAMMED!!

    Do a Google IMAGE SEARCH for ‘pyramid of capitalist’ to see a full color picture made way back in 1911, when capitalism was first discovered to be a con/sham instigated by the Free Masons/Illuminati. Folks sure bought into the thing… hook, line, and sinker just the same. The caps didn’t even check if a string was attached! Now THAT’S easy fishing, eh?

    Time to level the felony pyramid scheme called capitalism. Abolish economies and ownershipism worldwide, and hurry. Economies just cause rat-racing, and rat-racing causes felony pyramiding. BUST IT, America! Look to the USA military supply/survival system… (and the USA public library system) for socialism and morals done right. Equal, owner-less, money-less, bill-less, timecard-less, and concerned with growth of value-criteria OTHER THAN money-value. Quit doing monetary discrimination immediately, and make it illegal. There are MANY measurement criteria of “value”… not just dollars. Try morals, efficiency, discrimination-levels, repairability, etc etc. Economies are cancerous tumors, and to cheer for their growth… is just insane. Profiting causes inflation, so if caps LIKE inflation, and if they LIKE a terrible time in afterlife when they meet the planet’s ORIGINAL OWNER before caps tried to squat it all with ownershipism, then keep it up with the felony pyramiding. I dare you. While us Christians are finally bulldozing that pyramid scheme back to level, lets make servitude and “join or starve” (get a job or die) illegal in the USA, and lets level the architecture seen in USA courtrooms, too. Right now, USA courtrooms are church simulators or “fear chambers”, by special design. Sick.

    Isn’t that back-of-the-dollar pyramid… a Columbian freemason symbol? And WHERE is the USA gov located? District of Columbia? (Not even part of the USA!) How much more blatant can ya get? The “Fed” runs a pyramid scheme called the free marketeers. If you’re using the “federal reserve note” certificates, or using no-other-living-thing-on-the-planet entitles of ownership, you’re bought into a servitude/slavery con/sham… called capitalism. Pyramiding 101.

    Larry “Wingnut” Wendlandt
    MaStars – Mothers Against Stuff That Ain’t Right
    Bessemer MI USA

  3. Wow, took me right back to me hippy daze:

    “Us American Christian socialists are still patiently awaiting the natural fall of the pyramid-o-servitude…”

    Us hippies, oops, I mean WE (hippies) got impatient and evolved.
    Now we happily live _within_ the pyramids. I’ve been using the same razor blade for twenty years now*.

    The servitude isn’t all that bad. When it’s _particularly_ servile,
    I whistle up my dog and we wander through the shadow of the valley. Make sure he stays behind me, though. Have to command him that I shalt have no other dog before me, the barking stops and it’s all cool again.

    Sounds like you’re ideally located in the US, Wingnut.

    * Beard probably extends blade life… .

  4. Go easy on TEAM AMERICA (“Fu*K YEAH!!”) Biker, your shtick is very much an acquired taste!! :)

  5. T-o-x-i-c, mate.

    We all go through phases and stages, but a volume knob helps at times.

    Just need a really good laugh at times… . :D

  6. Reckon, Biker!!

    I think it is very important to develop good shtick, humourous material that you make your own. eg When I was last in USA a really unhealthy looking fat guy sat down at a restaurant table just alongside us. When his meal came he had a huge side of greens. He looked at the collards and said, kinda slow:”Hell No!” Non-intimidating tone, spoken slowly. I absorbed that and it has become a good part of my shtick. Instead of saying ‘No’ which is boring I’ll say ‘Hell No’ in exactly the same way as he did. Nearly always gets a laugh…Goodnight Biker!!


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