The Danger of Chinese Wavering

The signs should have been apparent during Secretary of State Hillary Clinton's recent trip to China where considerable effort was given to convince the Chinese Government to maintain and increase their holdings of US Treasury Bonds. China is the United States single largest foreign creditor.

The Obama Administration's 4 Trillion Dollar Gambit is based largely on the continued support of the Chinese investment in the United States economy. Roughly half of China's 2 Trillion in currency reserves are held in US Treasuries, and if this were to change, a collapse of the US economy due to hyper-inflation and government default could quickly ensue.

"We have made a huge amount of loans to the United States. Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried," Premier Wen Jiabao said at a news conference following the closing of China's annual legislative session. "I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets."

While Wall Street showed signs of rebound this week, many are cautioning that it was nothing more than a bear rally, and not indicative of an actual recovery. The Obama Administration, earlier denying that it pays much attention to Wall Street, took the rebound as a sign that their policies are beginning to have effect.

Premier Wen also asserted that his government would not bow to pressure to devalue their currency, and that the Chinese economy remains robust enough to increase stimulative spending if necessary despite recent drastic decreases in exports.

"As people look at equities and corporate bonds, they are saying that they maybe don't need to have that kind of money in Treasuries," said Andrew Brenner, co-head of structured product in New York at MF Global Ltd. "The comments from the Chinese premier let people know that the largest holder of Treasuries is concerned about adding to it."

Derek Fellows said earlier this year, "There is future danger in the possibility that we will run sustained, gigantic deficits. The longer these last, the more likely it is that U.S. treasuries will become relatively less attractive, thereby tipping the balance of influence toward China. The U.S. could come to need Chinese purchases more than the PRC needs American bonds, yet another argument to control the federal budget."

China, which has long been a supporter of Developing Nations around the globe, is pushing for increased IMF support for developing nations, and a Chinese foreign agenda that sees continued and expanded efforts in Africa, The Americas, and Asia.

Sources:

Breitbart.com, China 'worried' about US Treasury holdings, by Joe McDonald
The Wall Street Journal, Wen Voices Concern Over China's U.S. Treasurys, by Andrew Batson and Andrew Browne
Bloomberg.com, Treasuries Fall as Stocks Rise, China Comments on Debt Safety, by Susanne Walker
The Heritage Foundation, China, Debt, and Influence, by Conn Carrollhttp://www.tcotreport.com/http://twitter.com/MJBernardhttp://www.fargoneworld.blogspot.com