What would be the effect of China dumping their treasuries, for example in the event that they need cash because their economy tanks. My guess would be that they have to dump them on the open market, thus driving down interest rates. But there would be a lot of cash running out of our system, too. Can anyone explain the cause/effect that would happen, please? Thanks!
if they need cash, they would just print more. there is no need to dump treasuries. besides, who is going to buy them?
Yeah, good point. I realized that right after I posted it. So that would drive our rates up, and probably drain liquidity from the stock market, right? As for the other poster - are you saying China would rather hang onto the Treasuries and print more money? What (even just hypothetically) would cause China to dump them?
Tons of people would buy them because they would sell at a discount. If they dumped them all, people might end up getting a real interest rate of 15% on those treasuries at maturity. Or heck..the government might just buy them and retire some of their debt. If china has $1 trillion of treasuries and dumps them all at a 20% discount, the government could just buy those back for 800 billion and we just made an easy $200 billion. I've seen alot of real estate companies doing this as of late. (Like SFI) People are scared thinking these companies are going bankrupt and they are dumping their bonds for 30 cents on the dollar and the real estate companies are buying their bonds back on the open market. So the real estate companies, for instance sold 500 million of bonds and bought 500 million of real estate. Real estate went down 30-40%, so the 500 million property is worth 300-350 million. But they are buying their bonds back for 30 cents on the dollar meaning the 300-350 million dollar properties are only costing 150 million now.
They dump treasuries to save their economy as you said. 1) They get the dollars and buy yuan. yuan rises, doesn't save their economy. 2) They get the dollars and buy oil and give people free oil. Then oil prices rise. In either case, they didn't get the treasuries for free. They sold yuan debt to get it. The yuan debt is worth more than the dollar debt, so the world will suddenly realize that China is not so debt-free after all.
Obviously prices would sag but not much. Despite myth China only holds about 7% of total Treasury holdings (they're not even #1-Japan is) and there's enough pent up domestic institutional demand that supply would move. I know a roster of millionaires who'd jump through hoops to get 5% on 10 years.
http://www.guardian.co.uk/world/2009/mar/14/china-us-economy ......There was friction in January when Timothy Geithner, the US treasury secretary, said Obama believed China was manipulating its currency, but the US administration subsequently rowed back. Analysts said Wen's remarks were a coded message to Washington to exercise caution. "China is telling the US to be careful, not to overspend and keep an eye on the dollar," Kelvin Lau, regional economist at Standard Chartered in Hong Kong, told the Associated Press. Washington needs to continue selling treasury notes to fund its $787bn stimulus package. Last month Hillary Clinton, the secretary of state, urged China to maintain its stock as she visited the country. "They are worried about forever rising deficits, which may devalue treasuries by pushing interest rates higher," JP Morgan economist Frank Gong told Reuters. Beijing is aware that abrupt action would punish the dollar, damaging the value of existing holdings and affecting the sale of goods to its biggest export market. Turning to the wider economic picture, Wen said China would find it difficult, but possible, to reach its 8% growth target. Independent economists suggest the figure could be as low as 5% - enviable to most major economies, but potentially too low to keep unemployment down. China's authorities are worried about the prospect of millions of laid-off workers returning to the disgruntled provinces.