What's to Become of China?

I see today that Chinese dollar reserves have now broken below the 3 trillion dollar level. That may seem like a lot, but it is alarming.  As I commented at http://gordon-feil-economics.blogspot.ca/2017/01/china-is-going-broke.html, the combination of illiquid dollar investments and cushion needed to bail out the troubled Chinese banking system, reduces the useable reserves to probably about a trillion. They blew through 800 billion dollars last year, so this remainder isn’t much.

Chinese export of dollars has ultimately chased U.S. treasuries. This has had the effect of putting downward pressure on U.S. interest rates. When there is a demand for treasuries, the price goes up, and it is the difference between the price paid and the redemption (face) value that constitutes the effective interest. High buying pressure narrows that gap and reduces interest earned.

China is losing its ability to export U.S. dollars, and that means less dollars chasing USA debt, so this would tend to make interest rates rise. I suspect that the Trump administration will pressure American banks to use some of their huge reserves to buy that debt though. I also suspect that China will do a MASSIVE devaluation of the yuan to attract dollars back.

China has problems besides its currency and hemorrhage of capital. Trouble with its neighbors. Trouble with Trump who is plain spoken and doesn’t pussy foot around the issues that bother him. A huge debt bubble ready to pop.

I’ll say it again: China is in major trouble. It looks like friendly relations with the USA will be ending. Chinese culture does not like direct embarrassing communications. It wants to save face.  Trump isn’t one to play that game.  The Chinese may get aggressive to save face. There may even be military action.