Tuesday, April 04, 2006

China & Mortgage Debt

There are growing concerns that China is less willing to finance US debt. Here is a Reuters article:

China should gradually reduce its holdings of U.S. debt and can stop buying dollar-denominated bonds, a Hong Kong newspaper on Tuesday quoted Cheng Siwei, a vice chief of China's parliament, as saying.

With China a leading financier of the U.S. current account deficit, Cheng's comments sent the dollar lower against the euro and yen and also pushed down prices of U.S. government bonds.

The Beijing-funded Wen Wei Po daily carried Cheng's comments, made in Hong Kong on Monday, but it was not immediately clear whether they reflected those of top decision makers who determine the content of China's reserves, the world's largest.

Cheng is one of more than 10 vice chiefs of the parliament and usually speaks on economic policy. His rank is equivalent to vice premier, outranking cabinet ministers, but he does not have specific responsibility for economic policy.

Some of the Chinese holdings of US debt are mortgage backed securities. Even if China does not reduce its US debt holdings and merely decides to stop buying US debt that would significantly raise borrowing costs for various types of US debt including mortgages. Remember 8 or 9% mortgage interest rates?

8 comments:

  1. It does not matter whether they hold T-bonds or mortgage backed bonds, any significant move by a larger holder can cause a big problem. If -and this is a BIG if- the Chinese do anything to diversify, that could raise interest rates significantly.

    I think the thing here is whether this guy knows what he's talking about or not.

    Personally, I dont think the Chinese want to hurt our economy, becouse we buy all thier junk.

    -X


    BubbleTrack.blogspot.com

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  2. I agree with Bubble-X. China has too much in stake with the US economy. If American consumers stop spending for goods produced in China and over-paying mortgages, the effect on the Chinese economy would be severe.

    In other words, China is the drug dealer and we are the biggest-spending addict: we can't live without each other.

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  3. Remember 8 or 9% mortgage interest rates?

    Hell we're already seeing 10.5%

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  4. They must have bad credit.

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  5. If the U.S. does not get a handle on the insane levels of personal/government/corporate debt eventually the global economy will collapse. Not because the Asians want it to or the Arabs quit selling oil to us for dollars but because the system the way it is now is unfair and unsustainable. Japan, China, and OPEC countries are all propping up the U.S. government/economy. No matter how much the world wants to sell stuff to the U.S. or whether they tacitly approve of our military position in the world, once they get their fill of dollars and so does every other country in the world then it is game over for most US imports. Now that we have sold all our industries we are going to look mighty funny pushing our cars around while wearing homemade bluejeans.

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  6. The Chinese are bluffing. Who the hell is the gonna buy their junk? Not the Japanese and the Europeans who are more interested in protecting their industries. The fact is, the current Chinese leadership is completely illegitimate and any economic panic will lead to domestic turmoil and their down fall. If anyone reads the news closely, there were several hundred riots (due to pollution, corruption, property rights, etc.) throughout Chinese countryside last year. No one hears about it because of media suppression in China. If they want to stay in power, they have no choice but to keep the game going. Or they could go back to old school communism, known as Marxist communism, rather than oxymoronic capitalist communism.

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  7. If you owe someone $10,000, you're under their control.

    If you owe someone $10,000,000, they're under _your_ control.

    It definitely is a pusher/junkie codependency going on, this goods for debt deal with China. And in the end, congress could just pass a law defaulting on debts to nations that don't have democratic governments, support terrorists, etc.. Oh, and what happens when Americans can't get their Chinese goods at Wal-Mart? Chinese migrants out of work and _PISSED_. Think the government can tolerate that? Think the rural riots times a few thousand!

    Nope, the US can get away with using China as a huge inflationary heatsink until the revolution comes, or until Europe gets its head out of its ass.

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  8. China's economical power has grown in the last 10 years into probably the most powerful country ever. The mortgage situation in the US is directly effected by the investment by the Chinese. Fortunately there are things like mortgage bonds to help stop negative equity.

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