China Increases U.S. Treasury Holdings

New data shows that China increased its holdings of U.S. treasuries by 3.1% in July (see graphs below). Up from a decrease in holdings of 3.1% in June. This is something to keep an eye on. If China stops buying U.S. treasuries we could see a significant increase in interest rates on U.S. bonds.

Trade War?

According to Geoff Dyer of the Financial Times:

A full-blown trade row erupted on Sunday night between the US and China after Beijing accused Washington of “rampant protectionism” for imposing heavy duties on imported Chinese tyres and threatened action against imports of US poultry and vehicles.

Trade relations between two of the world’s biggest economies deteriorated after Barack Obama, US president, signed an order late on Friday to impose a new duty of 35 per cent on Chinese tyre imports on top of an existing 4 per cent tariff.

I guess Obama needs to Google "Smoot and Hawley." By the way China happens to be the largest holder of U.S. debt, not a good idea to anger them.

Read the whole story here.

China Dismayed By U.S. Money Printing

According to Ambrose Evans-Pritchard of the UK Telegraph:

Cheng Siwei, former vice-chairman of the Standing Committee and now head of China's green energy drive, said Beijing was dismayed by the Fed's recourse to "credit easing".

...

"If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said.

China's reserves are more than – $2 trillion, the world's largest.

"Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets," he added.

The comments suggest that China has become the driving force in the gold market and can be counted on to
buy whenever there is a price dip, putting a floor under any correction.

Read whole article here. This may help explain why China is now a net seller of U.S. government bonds. Even Alan Greenspan is now even warning about the potential for double-diget inflation due to U.S. monetary expansion.

The U.S. is addicted to borrowing, credit, and money expansion; if these trends continue the dollar will be worth significantly less. These trends can be reversed. I don't want to see the dollar one day worth the same as toilet paper.

China Is Selling U.S. Government Debt

In June 2009, China reduced their holdings of U.S. treasuries by 3.1% (see graph below).


Over the past year China has been growing their holdings of U.S. treasuries at an ever decreasing rate and is now reducing their holdings of U.S. government debt (see graph below).


This is a key trend to follow. If this continues interest rates on U.S. government debt could rise significantly as the U.S. needs to raise massive amounts of money due to huge budget deficits.

Data Source For Graphs: U.S. Department of Treasury

Friday Afternoon Linkfest: Required Reading

1. Warren Buffett gives a warning on U.S. debt.

2. Warning: China reduces holdings of U.S. government debt.

3. Andy Xie: New Bubble Threatens a V-Shaped Rebound.

4. 1 in 8 US Mortgages Falling Behind.

5. Barry Ritholtz on the latest existing home sales numbers.

6. FDIC is bankrupt. Read it here. Even though the FDIC is bankrupt it will not run out of money because Congress will most likely bailout the FDIC. Read it here.

7. Mexico decriminalizes small-scale drug possession. Glenn Greenwald on the drug decriminalization in Portugal. Read and watch here.

8. What Would Jesus Do? Ask Obama. The president's troubling use of religion to sell health care reform.

China Economic Update

Today Shanghai stocks represented by the Shanghai composite index lost 5.8% on the day. China's Shanghai Composite index ended at 2870.63 down 176.34 points from Friday's close. This was the largest percentage decline in one day since November for the Shanghai Composite. In Shenzhen, the main stock index dropped 6.6% to 955.87. Hong Kong's Hang Seng Index fell 3.6%, led by a decline in China-related stocks. Read the whole story here. I reported a few weeks earlier about some of the problems in Chinese economy and urged people to take some profits in Chinese stocks.

As of Friday the Shanghai Composite was up over 100% since the 2008 low (see chart below).


Since the global financial crisis began the Shanghai Composite Index is still down over 50% from its all time high of over 6,000. See Chart Below.



Almost all global markets were down today from Shanghai, to Australia, to London. Many equities around the world were getting overbought particularly in the United States, no wonder the stocks pulled back some today.

Note: Source of both charts was Yahoo Finance.

China Recovery?

I have been largely positive on a Chinese economy recovery and the Chinese economy in general. However, evidence is coming in that is contradicting my China bullishness. Two days ago there was an article in Forbes very negative on China. Today a piece came out in the Telegraph by Ambrose Evans-Pritchard also very negative on the Chinese economy.

According to Evans-Pritchard,
"China's banks are veering out of control. The half-reformed economy of the People's Republic cannot absorb the $1,000bn (£600bn) blitz of new lending issued since December.

Money is leaking instead into Shanghai's stock casino, or being used to keep bankrupt builders on life support. It is doing very little to help lift the world economy out of slump."

The article goes on to lay out some of the troubles Chinese economy (and for that matter the global economy) may be in for. It is a very interesting read.

Anyone investing in China should be aware of this information; this information has made me reevaluate my very bullish position on the Chinese economy. I am now a tiped bull on China for the time being. However, it may be time to take some profits in Chinese stocks, after all the Shanghai composite index is up 70% since November. Having said that I think there are many great opportunities to invest in China, just exercise some prudent caution. Stay Tuned...

Chinese Economic News

1) In an interesting article in Forbes today. Gordon Chang is skeptical about an economic recovery in China. If Gordon Chang is right this is not good news for the global economy.

According to Chang,

"So, as big as all of Beijing's spending programs are--they could end up being about 18% of GDP and the largest in the world on a percentage basis--they are not enough to stop the country's accelerating decline for more than a few quarters. China was once in a supercycle upward. Now it has turned a corner and is in a supercycle in the other direction. At some point, this will become evident, even to the World Bank. "

Yikes but I'm sure Jim Rogers would disagree with this analysis. It will be interesting to see who ends up being right.

2) China is buying record amounts of iron ore. Read about it here.

3) The US dollar falls as China calls for a global currency. Read about it here.

4) China is trying to hedge against its dollar holdings. Very smart move I say because there are budgets deficits in the United States as far as the eye can see. One way they are hedging is by buying gold.