Not many people realize that the economic relationship between China and US is a quid pro quo that is just meant to prop up the feeling of wealth. Despite the fact that I am nowhere near to as economic-savvy as most of the world economic gurus, I do believe it is a case of "Who Blinks first?" kind of a scenario!
The relationship though fruitful until now, is by no means sustainable on a long term basis! Action of both, the US and China are meant to help each others economy. What probably has not been factored is the rise or interaction of any other economic entity that might upset the cart!
This diagram best explains what is going on:
- US uses Dollar to buy cheap goods from China
- China sends the goods.
- Now, China has the Dollars – it invests in US Treasury – so it send the US dollars it earned from selling goods back to US
- US in turn provides IOUs that will be paid later (by the coming generations) called US Treasury!
So, it is a simple case of the present generation of Americans financing its purchases of cheap goods by issuing IOUs in the name of their grandkids…and enjoying itself. While the Chinese are building one, a repository of wealth (money), and second the seemingly infinite ability to manufacture goods that can be supplied to the world. Until now, the supply chain was a corporate concept.. as in a company’s supply chain had to be efficient. China gave a new dimension – National Supply Chain. The Supply Chain of a country needs to be efficient. And as of now, no one has it laid down as well as China!
Now, look at the figure #2. The race is between consumptions – of Goods and Treasuries. Anyone who reduces the consumption of any one of these from the other – will put the entire World Economy in peril – not just each others’! So, even if China doesnt raise its investment in US Dollars as much as the rate of growth in US purchases from China, the results would be catastrophic!
This is where the recent news attains significance. The signs are that this divergence might have just started! Chinese Investments in US treasuries may be straightening.
A sharp drop in foreign holdings of US Treasury bonds over the last five weeks has raised concerns that China is quietly withdrawing its funds from the United States, leaving the dollar increasingly vulnerable.
So, where may the Chinese be investing in – if they aren’t in US Dollar…. and in any other alternative currency, as the data suggests?! That centuries old investment – GOLD!
"We won’t know if China is behind this until the Treasury releases its TIC data in November, but what it does show is that world central banks are in a hurry to get out of the US. They don’t seem to be switching into other currencies, so it is possible they are moving into gold instead. Gold is now gaining momentum across all currencies and has broken through resistance at 500 euros," he said.