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China's
Attempt to Convert its U.S. Treasury holdings into euros
By
M.CAM Inc
11/29/07 --- - As I discussed previously, the Chinese
currency wild-card may become relevant far sooner than expected.
An effort by China to convert its $1.4 trillion U.S. Treasury
holdings into euros is not viable for many reasons -- not the
least of which is the European Central Bank's inability to
absorb such an event. As China continues its rush away from
supporting U.S. Treasuries and as Middle Eastern investors are
buying them up in more diversified holdings, a new "currency
exchange" is unfolding. Realizing that they cannot liquidate
their holdings, it appears that the Chinese are currently using
their U.S. Treasury holdings as collateral for euro denominated
purchases and long term infrastructure transactions. In other
words, they may be "liquidating" their holdings as collateral
and, in so doing, effectively migrating to non-dollar value
without ever having to officially dump their current Treasury
holdings.
Therefore, collateralize the credit in dollars -- especially if
you're long in dollars. The lender/financier won't call the note
because you have it structured in such a way to both allow it to
perform and hold illiquid collateral that no one wants. This
essentially inflates euros. Although you can't sell dollars, the
whole purpose of collateral is that it is a second source of
payment -- collateral is there to down rate the risk of the
loan. Secondary becomes irrelevant.
When February comes, the Chinese are going to do something as
they will have to decide what the exposure is going to be with
the treasury. As I see it they have to just dump the treasury.
They only keep it because they can use it -- they have 43%
direct/indirect of US treasuries so they'll dump them on the
market.
The US Congressional pressures to decouple the RMB will work,
but not in the way we want. Our plan includes helping them hold
on to the treasuries, it does not involve them not holding the
dollar anymore. The US wanted the tether to be part of the
float. This will cause disenfranchisement of the US electorate
(during primary season). February is also when public (media)
will realize we won't pull out of this.
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