China just dumped the largest amount of U.S. Treasuries and Agency Debt in history. Probably Fine pic.twitter.com/GrqWIq3Jcp
— Barchart (@Barchart) May 16, 2024
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China is getting rid of the dollar at a record pace
Sun 19 May 2024 ▪
7
min read ▪ by
Getting informed
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Invest
China accelerates its dedollarization with record sales of US Treasuries. The world will soon need a new reserve currency: Bitcoin.
China is no longer investing in US debt
China has offloaded the equivalent of 76 billion dollars in US Treasuries over the past three months. Its reserves held in US debt are at their lowest since 2009, at 767 billion dollars.
According to US Treasury data, China holds less than 10% of the 8,100 billion in Treasuries held worldwide in reserve. And only 2.2% of the total US debt, which reaches 34,537 billion dollars.
Japan is the country that holds the most (1,187 billion dollars). Then comes China, the United Kingdom (728 billion dollars), Luxembourg (400 billion dollars), Canada (359 billion dollars), Ireland (317 billion dollars) and Belgium (317 billion dollars).
China’s massive sales are likely in retaliation for the TikTok ban as well as recent tariff increases on a range of Chinese products. Donald Trump threatens to elevate them to 60% in case of reelection in September.
“China’s sale of US Treasury securities could accelerate with the resumption of the trade war between the two nations”, says Stephen Chiu, FX strategist in Asia for Bloomberg Intelligence.
Conversely, diplomatic and economic relations are in good shape with Russia. Currently in China for his first trip abroad since his reelection, Vladimir Putin declared:
“The joint decision taken at the opportune moment to ensure that transactions are conducted in our national currencies has given a strong boost to our trade exchanges. Today, 90% of payments are made in rubles and yuans.”
Dedollarization is gaining traction and the ten BRICS nations are not lagging behind. On this topic, don’t miss our article: The IMF sees the dollar giving way to other reserve currencies.
Dedollarization = Inflation
For 37 consecutive months, annual inflation has not been below 3% in the United States. Prices have increased by nearly 20% in less than four years. And certainly more, since statistical institutes use accounting tricks to hide the reality.
In other words, the dollar has lost a fifth of its purchasing power in less than a handful of years. The American Dream seems very distant, and dedollarization will not improve matters.
The United States has long benefited from the fact that nations hold their foreign exchange reserves in the form of Treasury bonds. This allows for a chronically deficit trade balance without the dollar falling. This is the famous “exorbitant privilege” without which inflation would be much higher across the Atlantic.
“There are a lot of inflationary forces ahead of us”, said the CEO of JP Morgan in an interview with Bloomberg. The culprits are the costs related to energy transition, remilitarization, infrastructure spending, trade wars, not to mention the budget deficit.
“I think the chances that inflation remains high or that rates increase are greater than we think”, he said. Jamie Dimon had already made similar remarks in his annual letter to shareholders, stating he was preparing for interest rates ranging from 2% to 8%, “or even more”…
For the banker, the geopolitical risk is crucial given its impact on oil and gas prices, trade, and the game of alliances. With the war in Ukraine, the situation in the Middle East, and the use of nuclear blackmail, the geopolitical situation is “very tense”, he warns.
The worst-case scenario would be an oil embargo in reaction to Israeli actions in Palestine. A drastic reduction in Sino-American trade would also be very inflationary.
Knowing that inflation is already such that it is rumored that central bankers will raise their inflation target in the coming years. This is what Christine Lagarde hinted at during an interview with the Council of Foreign Relations.
Bitcoin Insurance
Prices will never drop and the value of the dollar will continue to evaporate. To convince yourself, see below the extent of financial promises (especially retirement pensions) that will require new borrowings (unfunded liabilities):
This is roughly 55 times the tax revenue, which is equivalent to a salary of 100,000 dollars and a debt of 5.5 million dollars.”
New generations would do well to choose their investments wisely, as they won’t have retirement… And let’s not even mention the peak oil that will further worsen the situation…
[Our article on this topic: Bitcoin and Endless Inflation]
At the level of nations, it is only a matter of time before some refuse the bills of hostile neighbors. Why would Beijing accept to place its reserves in US debt if it gets increasingly higher tariffs in return?
It is no coincidence that China and countries distrustful of the pax americana are increasing their gold reserves. All major developed countries accumulated as much physical gold as possible during and after World War II…
Gold today represents 5% of Chinese reserves and 20% in the case of Russia. Unfortunately for gold, it is not a payment network like the SWIFT network. Even in the era of the Gold Standard, it was actually the dollar that was circulating.
The world needs a store of value that is also an international payment network. That is precisely what Bitcoin is. Moreover, it is a much better store of value since it exists in absolutely finite quantity. Nearly 94% of bitcoins are already in circulation. As for gold…
The problem is that China still sees Bitcoin as a threat to its capital controls. But if the Chinese want to trade on equal terms with the West, a gesture will have to be made in that direction. The anathema on Bitcoin will then no longer make any sense.
Stateless and uncensorable, Bitcoin would allow for exchanges on equal footing. It is designed to become an essential link in international trade.
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Bitcoin, geopolitical, economic and energy journalist.
DISCLAIMER
The views, thoughts, and opinions expressed in this article belong solely to the author, and should not be taken as investment advice. Do your own research before taking any investment decisions.