Will China Sell U.S T-Bills to Cover Their SOE Losses?

There are more news reports that the Chinese government has invested too much money in low productivity state owned enterprises. These SOEs probably offer kickbacks to the politicians but they are unlikely to yield Facebook or Google style profits.  As these SOEs lose money, who pays for these bad loans?  

I can imagine that if the losses are large enough that China will sell a few trillion dollars worth of US Treasury Bills or not roll their money over again when the existing bonds mature and U.S interest rates will rise sharply.  How much will U.S interest rates rise to attract alternative capital to purchase them?    How will this rate rise affect home prices? How will declining home prices affect rising foreclosure rates?  General Equilibrium is an exciting field!

On an unrelated point, here is a cross-post on the job costs of individual states introducing carbon cap & trade legislation.

Author: Matthew E. Kahn

Professor of Economics at UCLA.

4 thoughts on “Will China Sell U.S T-Bills to Cover Their SOE Losses?”

  1. Chinese state-owned banks loan state-owned enterprises Chinese currency, and are unable to pay that money back. That sounds like an accounting problem, or, maybe, a problem for bankruptcy. I am missing how, exactly, this leads to China selling U.S. Treasuries. How does that help China resolve the insolvency of SOEs?

    China bought U.S. Treasuries to keep down the international exchange rate of their currency, the renminbi or yuan, relative to the dollar. If they abandon or reverse that policy, internationally, the yuan will rise relative to the dollar, in effect devaluing the dollar in international trade. And, domestically (meaning inside China), price level changes might ensue as well, as the Treasury-buying was linking to “sterilization” of the dollar-inflows associated with China’s huge trade surplus.

    I can understand why China might want to reduce its trade surplus, and to see their domestic economy shift toward a greater reliance on domestic demand. A higher value for the yuan relative to the dollar could be helpful.

    I’m still missing the link back to the price of U.S. Treasury bonds in dollars (not yuan), as well as to why losses at Chinese SOEs would motivate China to sell U.S. Treasuries.

    Are you saying that the Fed will want to leverage the devaluation of the dollar to generate additional inflation in the U.S. and the inflation premium on longer-term U.S. bonds will rise? That doesn’t seem like a plausible interpretation.

    You wrote, “attract alternative capital”. What is “capital”? Do you mean some other locus of dollar savings? Given the high rate of unemployment already in the U.S., I would not think replacing China in the role of disemploying American resources would be considered desirable.

  2. I can’t speak to the CHN and T-Bill points above, but Matt raises a set of interesting questions in the next post over from his cross-post = Portland and drinking water costs.

  3. “….that China will sell a few trillion dollars worth of US Treasury Bills or not roll their money over again when the existing bonds mature and U.S interest rates will rise sharply.”

    This assertion merely betrays a profound ignorance of how interest rates are set or how a central bank works in a fiat currency system. The Chinese are fully aware of this. Mr. Kahn, it would appear, is blissfully unaware.

  4. Why would interest rates rise? The “serious people” have been hyperventilating about inflation for years now and you gotta keep wages down to prevent inflation. On top of that, the banks get to borrow from the US at zero and buy treasuries at ~3%, it is free money! Why would they want that to change?

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