9/15/2011 - China to 'liquidate' US Treasuries, not dollars

The debt markets have been warned.

A key rate setter-for China's central bank let slip – or was it a slip? – that Beijing aims to run down its portfolio of US debt as soon as safely possible.

"The incremental parts of our of our foreign reserve holdings should be invested in physical assets," said Li Daokui at the World Economic Forum in the very rainy city of Dalian – former Port Arthur from Russian colonial days.

"We would like to buy stakes in Boeing, Intel, and Apple, and maybe we should invest in these types of companies in a proactive way."

"Once the US Treasury market stabilizes we can liquidate more of our holdings of Treasuries," he said.

To my knowledge, this is the first time that a top adviser to China's central bank has uttered the word "liquidate". Until now the policy has been to diversify slowly by investing the fresh $200bn accumulated each quarter into other currencies and assets – chiefly AAA euro debt from Germany, France and the hard core.

We don't know how much US debt is held by SAFE (State Administration of Foreign Exchange), the bank's FX arm. The figure is thought to be over $2.2 trillion...

The Chinese are clearly vexed with Washington, viewing the Fed's QE as a stealth default on US debt. Mr Li came close to calling America a basket case, saying the picture is far worse than when Ronald Reagan and Margaret Thatcher took over in the early 1980s.

Mr Li, one of three outside academics on China's MPC, described the debt deals on Capitol Hill as "just trying to by time", saying it will not be enough to stop America's "debt dynamic" turning dangerous.

Source

Does anyone still regard China as some overrated 3rd-world upstart? Well if you read the full article Mr Li is talking about China looking to invest $10 trillionin US assets (-if allowed). A player with that much clout can make game-changing calls - and initiating the liquidation of over $2 trillion in US treasuries would certainly come into that category.

The whole debate about whether China would like to bring the dollar down becomes less ambiguous if these policies transpire into reality; it's not that China wants to bring the house down - rather they want to use whatever safe assets the US might have as homes for their investment capital.

(Unfortunately it seems they no longer regard US treasuries as safe investments...)