‘Pity the Chinese’ says Scott Grannis at Calafia Beach Pundit. They’ve bought enormous amounts of U.S. government debt, yet the average yield they’re getting is now probably just ‘1-1.5%’.
Then there’s the yuan. It has increased 8% vs. the dollar in just the last four months and is under massive market pressure to appreciate even further, which is bad news for China’s dollar-denominated U.S. bond holdings and means that years of interest payments have already been wiped out:
Revaluing one’s currency doesn’t come cheap, however, especially when the currency you are revaluing against is also the currency in which the majority of your reserve assets are denominated. The appreciation of the yuan over the past four months has effectively wiped out a little over 3 year’s worth of interest on their dollar security holdings. Further yuan appreciation, which seems likely, will wipe out even more of the value of China’s foreign bond holdings. They are truly caught between a rock and a hard place.
Moreover, China better hope it doesn’t get as hurt with its U.S. government bonds as Japan was before:
This reminds me of the massive losses that Japan suffered as result of the appreciation of the yen, which rose from 250/$ in 1985 to 80/$ at its peak in 1995. This 200% yuan appreciation destroyed fully two-thirds of the value of the countless billions of dollar assets that Japanese savers had accumulated. Recall that Japan was a major export engine at the time, its ageing population had a high savings rate, and the destination of choice for those savings—which were larger than could be accommodated by Japan’s own economy—was the U.S.
So while it might feel like the U.S. has the short end of the stick in terms of its vast indebtedness to China, perhaps it’s actually a pretty killer deal for America. You have 1) Chinese demand helping to drive yields lower, thus the U.S. pays lower interest, 2) A depreciating dollar meaning that the U.S. effectively doesn’t pay back its debt in full, and 3) most of the world urging China to allow the yuan to appreciate further.
What’s that saying? ‘Owe the bank thousands, you have a problem. Owe the bank millions, the bank has a problem’ …and if you owe the bank trillions, plus own the printing press, then the bank is just screwed.