• News
• 2024-05-16

China Ditches US Debt, Fed Cuts Rates Early

Despite the Federal Reserve's interest rate cut expectations, which have eased the liquidity issues of U.S. Treasury bonds, the staggering U.S. debt of 34 trillion yuan still has a significant impact on the current U.S. economy and has led to a series of contradictions.

The U.S. debt crisis has spawned a series of troubles.

Even now, the U.S. still faces many troubles. These include inflation crises, a 34 trillion dollar debt crisis, a U.S. government shutdown crisis, and a crisis of confidence in the U.S. dollar, among other issues.

As the Federal Reserve is the central bank of the world, changes in U.S. economic policy also affect many financial policy changes, including those in China. Therefore, the People's Bank of China has also taken a series of measures in response.

Is the frequent U.S. debt crisis, with the shutdown crisis being just one of the consequences?

What is the most urgent issue in the United States at present? It is undoubtedly the crisis of the U.S. government shutdown.

The current Biden administration and officials believe that maintaining the operation of the U.S. economy and government requires more fiscal spending and have proposed a budget with a deficit of up to 1.84 trillion dollars.

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On January 19th, is the U.S. government going to shut down?

However, Republican congressmen believe that this deficit is too large. If the U.S. continues to spend recklessly, the U.S. debt will soon become unsustainable, so they firmly disagree with this fiscal budget.

As a result, a peculiar situation has arisen: even though more than two months have passed since the 2024 fiscal year in the United States, the annual budget for the U.S. government has not yet been released. The Treasury Department is using last year's budget.This implies that if Congress does not pass the authorization by January 19th, then some agencies of the U.S. government will cease to function, potentially leading to a complete shutdown by February. Such a shutdown crisis would, in fact, undermine America's authority and influence on the global stage. After all, such an unusual situation is rare even in impoverished and underdeveloped countries, let alone in a developed nation like the United States, which is considered the world's leading power.

Some may wonder why the U.S. government frequently faces shutdowns. During the previous administration under President Trump, there was also a prolonged shutdown crisis.

In truth, beyond the partisan strife within the United States, where the opposition party often seeks to put pressure on the ruling party, the root cause lies in the U.S.'s $34 trillion debt crisis. Currently, the U.S. debt-to-GDP ratio has soared to 140%. If this trend is not controlled, by 2050, the U.S. will have to issue over $100 trillion in additional national debt. It is in this context that the Republican Party is using the opportunity to put pressure on the Democratic Party. They argue that if the government continues to spend at the rate advocated by the Democrats, the U.S. government's finances may not last more than a few years.

The U.S. Congressional Budget Office predicts that by 2050, the U.S. will have to print an additional $100 trillion.

Therefore, even with 10 days left before the deadline for a potential government shutdown, the two parties have not yet finalized the approval of the fiscal budget for 2024.

However, even if the two parties eventually reach an agreement and successfully avert the shutdown crisis, what good will it do? After all, the U.S. debt crisis is the root cause of the shutdown crisis. If this issue is not resolved, the problem of government shutdowns will continue to plague the U.S. government.How to deal with a crisis? Central bank sells US Treasury bonds and buys gold?

In essence, the shutdown crisis of the U.S. government is actually just one of the negative impacts of the U.S. debt crisis. Including the Federal Reserve's interest rate hikes in 2022 and the upcoming interest rate cuts in 2024, they are all a series of efforts and compromises made by high-ranking U.S. officials to deal with the crisis.

China has also been greatly affected by these global monetary policy changes, so the central bank has taken defensive measures to deal with this crisis and market changes, among which the most important are three points: selling U.S. Treasury bonds, regulating exchange rates, and buying gold.

In response to the crisis, the central bank has taken three major defensive measures.

First, let's look at the sale of U.S. Treasury bonds. In fact, the People's Bank of China has been continuously selling U.S. Treasury bonds for several years.

Since the interest rate hikes began in 2022, holding U.S. Treasury bonds has become unprofitable, because although the yield on U.S. Treasury bonds has risen, the price has fallen, and the price of 30-year U.S. Treasury bonds in the previous few months even fell by about half. If you hold U.S. Treasury bonds, it is actually a huge loss.

Therefore, the central bank has been continuously selling from its highest holding of $1.3 trillion in U.S. Treasury bonds, and after dozens of net sales over the years, it has now cumulatively sold about $550 billion in U.S. Treasury bonds, with the current holdings amounting to less than $800 billion.

Of course, the continuous ups and downs in Sino-U.S. relations, and the United States' hostility and sanctions against China, are also one of the main reasons for the central bank's continuous sales of U.S. Treasury bonds, after all, the credibility of the United States has become unreliable.

The amount of U.S. Treasury bonds held by China is only $769.6 billion.

Secondly, let's look at the exchange rate issue.In fact, over the past year, the central bank has intervened in the foreign exchange market on multiple occasions to maintain the stability of the renminbi exchange rate. In essence, we have been engaged in a "currency defense war" with the Federal Reserve.

The Federal Reserve's interest rate hikes were aimed at curbing the inflation crisis caused by the indiscriminate issuance of 4 trillion US dollars during the Trump era. However, due to the existence of the dollar hegemony, the rate hikes did indeed lead to the appreciation of the US dollar and the depreciation of the renminbi. The exchange rate of the renminbi against the US dollar once fell close to 7.3.

At this critical juncture, the central bank officially announced its entry into the market, repeatedly reducing the foreign exchange reserve requirement ratio, releasing positive news, injecting liquidity, and through deterring internal funds, insiders, holding meetings to shout at short sellers, and other actions. This helped the renminbi exchange rate to hold the 7.3 yuan threshold.

The Federal Reserve is about to cut interest rates, and the renminbi exchange rate is stable.

Now, the renminbi exchange rate has appreciated to around 7.1, and this currency defense war of the renminbi has actually been successful.

Thirdly, the People's Bank of China continues to buy gold, continuously stabilizing its foreign exchange reserves.

Few people know that the gold reserves of the People's Bank of China are very low.

According to data statistics, as of the end of December in China, our foreign exchange reserve scale is 3.238 trillion US dollars. But our gold reserves are only 71.87 million ounces, making us the seventh-largest gold reserve country in the world.

China's overall gold holdings are seventh, but the proportion is not high.

However, the problem lies in the fact that China is a vast country with abundant resources, not an ordinary small country. With gold reserves of up to 2,226.4 tons, they only account for 4.3% of China's foreign exchange reserves. In contrast, countries like Germany and the United States have gold that accounts for about 70% of their foreign exchange reserves.Therefore, data released by the State Administration of Foreign Exchange shows that the People's Bank of China has been increasing its gold holdings for 14 consecutive months.

Economists also indicate that as the U.S. debt level continues to rise, the credibility of the U.S. dollar is actually declining. At this relatively turbulent moment, gold is safer than the U.S. dollar. Moreover, geopolitical conflicts have led to the freezing of Russia's foreign exchange reserves, while the gold in Russia's treasury remains unaffected.

Thus, for China, it is not only necessary to sell U.S. Treasury bonds but also to continuously increase gold holdings, reduce dependence on the U.S. dollar and the euro, and use more gold to enhance the stability of China's foreign exchange reserves.

The central bank's continuous increase in gold holdings is essential and a matter of urgency, especially with the frequent frictions in Sino-American relations, as no one knows when the U.S. sanctions might arrive.

The U.S. debt crisis is difficult to resolve, and the Federal Reserve is forced to lower interest rates.

Of course, an inescapable issue in the coming years is the interest rate cuts by the Federal Reserve. In fact, whether it's raising or lowering interest rates, the Federal Reserve does not consider the global economy but serves the domestic U.S. economy.

The reason for the rate cut this time is that the U.S. economy will experience a recession in 2024 and ultimately have a hard landing. To prevent the U.S. economy from falling too severely, the Federal Reserve must release liquidity and take other measures through interest rate cuts to ensure that the U.S. economy achieves a "soft landing."

Biden hopes that Powell can "cut interest rates ahead of schedule."Not only that, but the current domestic interest rate levels in the United States are very high, which leads to high yields on U.S. Treasury bonds and a substantial amount of interest that the U.S. government has to pay. If the Federal Reserve could lower interest rates, it would help alleviate the U.S. debt crisis.

So, this time around, the Federal Reserve is actually forced to cut rates. Powell actually wanted to wait until inflation was pushed down to below 2% before cutting rates.

However, this year is an election year for Biden, and Biden cannot afford to see a recession in the U.S. economy. It would appear as if his governance is incompetent, so Powell eventually compromised. It is estimated that we will see the first interest rate cut by the U.S. in March this year.

Therefore, a series of major events in the United States and the Federal Reserve in recent years, ultimately, all stem from the butterfly effect triggered by the U.S. debt crisis. And this butterfly effect has not diminished over time; instead, its impact will be more profound. In my view, for the next decade or so, we will not be able to analyze issues without considering the debt crisis.

However, it is indeed admirable how the United States has managed so far. After all, if it were any other country, it would have collapsed by now. The U.S. has such a strong foundation that even with reckless spending, it can still hold on for a long time, which is something we cannot help but envy.