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After clamoring for a reserve alternative all year, the Chinese government agreed to a $50 billion currency-diverse deal with the IMF today. Back in June, the deal seemed imminent. This morning, it finally came to fruition.
In their deal with the IMF — the first of its kind for any nation, ever — China buys $50 billion worth of bonds denominated in Special Drawing Rights, which will represent a basket of global monies. (That basket will be a split between the dollar, euro, pound and yen… not exactly the gems of the global currency batch.)
Originally posted by Alphard
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China is now a net SELLER of U.S. Treasury notes and bonds
...Just a few days ago, the U.S. Treasury Department revealed that China actually REDUCED its note and bond holdings by $25 billion in June. Although China did NOT sell shorter-term Treasury bills — and isn’t expected to — it’s still the largest amount of Treasuries China has ever sold in a single month.
This is a huge development:
In 2006, China and Hong Kong accounted for more than 50 percent of the increase in the amount of Treasury debt sold to the public …
In 2008, their share had fallen to 22 percent as the U.S. government increased its public debt by a record $1.2 trillion …
In the first half of THIS year, China and Hong Kong acquired only 9 percent of the more than $800 billion worth of Treasury bonds that were sold — and now …
In June, China became a net SELLER of U.S. Treasury notes and bonds!
So what’s next? Will China dump the rest of its estimated $876 billion hoard of U.S. Treasuries and crash the Treasury market — and by doing so, kill the U.S. dollar, drive interest rates sky high and leave the U.S. economy a smoking ruin?
Absolutely not. Beijing’s leaders are far too smart for that. They’re well aware that doing that would crush the value of the Treasuries they own and cost them a king’s ransom.
But one thing seems clear: One of Washington’s most dependable sources of loans to finance our out-of-control deficits is drying up. That means demand for longer-term Treasuries is softening.
That also means you can pretty much count on much higher interest rates in 2010 and beyond — and you can count on those higher rates to crush any chances of a vigorous recovery or rapidly rising stock prices here.
Meanwhile — even as the U.S. stock market has rebounded by about 13 percent this year …
China’s Shanghai Index is up 46.5 percent — the average stock producing nearly $4 in profits for every $1 produced by the S&P!
Hong Kong is up 37.1 percent — three times more than the S&P 500 …
Singapore is up 47.2 percent, generating nearly $4 in profits for every $1 produced by the S&P 500, and …
Taiwan is up 48.7 percent, also beating the S&P 500 stock by nearly four to one.
In Vietnam, the average stock is up a resounding 73.2 percent — spinning off $5.63 in profits for every $1 being earned on the S&P 500