Trade War: China Dumped $77B in US Bonds to Devalue Yuan

Federal Reserve data published late on February 18 reveals China dumped about $75 billion in US bonds in the last six months of 2014. The action explains why interest rates on US Treasury bonds jumped by 23 percent since January, and economic indicators show the US economy growth is slowing and worldwide deflation is accelerating.

Breitbart broke the story last week that China’s real economic growth had crashed to 1.7% in the fourth quarter of 2014. We also warned last August that China appeared ready dump part of its $1.32 trillion holdings of US bonds in a scheme to drive American interest rates up; thereby strengthening the dollar and devaluing the Chinese currency.

China’s holdings in US bonds jumped from about $170 billion in 2003 to over $1.3 trillion in 2014. China used those bond purchases to drive the US dollar up and to keep the Chinese currency competitively “under-valued” to predatorily under-cut the sales prices for US manufacturers. The low interest rates fed an incredible American real estate bubble, despite relentless out-sourcing of jobs to China. But with the bankruptcy of Lehman Brothers, the US asset bubble collapsed into the worst recession since the Great Depression.

But with about 50 percent of GDP focused on capital invest to build more export capability, China almost collapsed as import demand from their US and European Union customers shriveled in the recession. The Chinese communist government responded by almost doubling their efforts to keep the yuan under-valued. China increased investments in U.S. bonds from $700 billion in 2008 to about 1.32 trillion in late 2013.

Interest rates fell to the lowest level in American history, and the US real estate market took off again. China initially experienced a huge export surge, but America’s energy boom since 2010 has increasingly over-whelmed China’s cheap labor advantage in manufacturing. Cheap energy is driving the strong American manufacturing reshoring trend that began in 2010.

Those ultra-low interest rates in the US also had the adverse consequence to China by encouraging $350 billion more in lending to US domestic energy exploration and development over the last five years. This resulted in more cheap energy in the US.

The People’s Bank of China responded in November of 2013 by announcing it was ending its purchase of U.S. Treasury bonds. China then sold $48 billion in US Treasury bonds in the month of January; American interest rates jumped-up, and the yuan weakened by 5 percent. China claimed they were not “dumping the dollar” on purpose.

But on the first day of the 2015 Chinese Lunar New Year, the Federal Reserve published their Treasury International Capital (TIC) report for the period from July 1, 2014 to December 31, 2014. The report shows that China dumped $76.9 billion, or about 6% of total US bond holdings in the last six months of 2014.

Bank of America Merrill Lynch now projects that because of the “currency devaluations” by China, the European Union, and others versus the US dollar, worldwide gross domestic product (GDP) will deflate by about $2.37 trillion in 2015 versus their original estimate just 90 days ago.

Facing a spike in unemployment and a potential banking crisis as corporate loans default, it now seems clear that China no other option but to sell US bonds to devalue their currency to regain manufacturing competitiveness. China’s self-serving actions will cost Americans jobs and could be the spark a 1930s type international trade war.


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