China may be thinking about bailing on the US?

http://imarketnews.com/?q=node/31523

Monday, May 30, 2011 - 23:11

China Has Done Study On Converting US Debt To Equities

BEIJING (MNI) - The Chinese government has completed a study on converting at least some of its U.S. debt holdings, including U.S. Treasury securities, into equities, the official Economic Information Daily reported, citing a former central bank researcher.

Jing Xuecheng, formerly deputy head of the Research Department under the People's Bank of China, told the newspaper that a research report on the debt-equity conversion issue has been submitted to relevant government authorities for review. snip

"We need to safeguard and increase the value of our investments in America. Debt holdings in this case means all kinds of bonds, including U.S. Treasury bonds," said Jing.

The latest U.S. Treasury data showed China's holding of U.S. Treasury securities stood at $1.1449 trillion at the end of March.

Trashing the US economy would pull theirs down too at this point.

You got a good customer who keeps running up a tab. He keeps buying your stuff. At what point do you realize he is never going to pay you back? Do you ease him down slowly (limiting his tab drinks to so many a night with that number steadily declining?).

I think anyone with common sense understands that our interest rate on Long Term debt is ridiculously low. How can you be certain when the Fed is buying debt hand over fist (effectively printing money to buy debt)? I would not want to be the one holding U.S. long term debt when the bubble pops. Even if the U.S. government honors its obligations, how much will those dollars being paid back be worth in real terms?

Because the US has never failed to repay any bond on maturity.

Some of the payback is his money, but not all and the bar tab keeps growing.

China has received payments for every mature bond it has ever held at expiration. Just like every other bondholder.

1.15T is a small fraction of the US's debt - about 14T IIRC. Even if they wanted to dump it all it would not cripple us. Bad, yes, but not catastrophic

They are however only talking about balancing not dumping. With US bonds paying historically low rates I don't blame them. The same policies that allowed me to get a 3.5% mortgage - fixed - this month, and allow businesses to borrow money cheaply for expansion and capital eqpt, also mean bondholders get minimal returns. When you are looking at 1-3% with fixed terms in bonds and equities that are generating even amateurs like me 8-9% ytd (I have a sneaking feeling the Chinese treasury has savvier fund managers than me) what would you do? The risk is greater, but China can well afford that.

Notice they want to INcrease total US investments - they just want better returns.

it makes sense to go to something safer. Like equity.

Since our long term interest rates are exceptionally low and we have so far no problem selling them, this would not appear to be much of a factr just yet.