BGN Entrepreneur

It is important to overstate how important Sino-US relations are going to be to the development of the world over the next 25 years. Clearly it is true at the geopolitical level. But the relationship will also affect the fate of the dollar, the US Treasury market, commodity prices and global equidities in profound ways.
In the recent years, China has been content to buy billions of dollars worth of US Treasuries, accept the pre-eminent role of the dollar in international trade transactions, and a limited role for its own companies on the world stage. That is changing and changing fast.
It is clear that Chinese policymakers are worried about the state of US finances. This is hardly surprising. The US Treasury is the world’s biggest debtor and the People’s Bank of China its largest creditor. Even under the rosier projections, America’s public debt will double to more than 80% of national income over the next decade. That will become difficult to finance in international markets, especially if the dollar continues to weaken. The starting point for the Chinese is that an estimated 70% of their reserves of more than $2000bn are held in Treasury or the debt issued by agencies such as Fannie Mae and Freddie Mac, the mortgage providers. Whatever interest it earns on its investments could easily be wiped out by weakening dollar. So there is talk of diversification. It doesn’t mean the Chinese will sell existing holdings, but it does mean that, in the future, the Chinese are likely to buy fewer Treasuries and invest additional reserves in other assets.

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