“Dollar Trap” Snaps Shut

One of the most intriguing political games being played out at the moment is the ongoing “death grip” between China and US over China’s massive (and growing) holdings of US paper.

Both countries stand to suffer massive losses if either country deviates off the current, unsustainable path. How China and the US can get out of this is not clear to me but the only answer I can see if for there be a slow unwinding of positions over 5 to 10 years. Speculators will not make this easy.

I happen to believe the dollar will come under increasing pressure and opens up some interesting futures trading opportunities although there are other good FEX deals out there at the moment (on which more another day).

Stick the following title into google to read the whole story.

China Stuck in “dollar” trap [FT]

“China’s official foreign exchange manager is still buying record amounts of US government bonds, in spite of Beijing’s increasingly vocal fear of a dollar collapse”.

The article goes on to say that China has little choice but to keep buying US paper. It is in a dollar trap. The massive volumes involved means that Chinese buying of any other currency would distort the market. Likewise, selling dollars would cause a collapse in the dollar.

I suspect Chinese outbound FDI will increase with less emphasis on US paper but this will be a long process. Look what happened to Japan when it went down this route in the early 90s.

China is overextending itself and its expertise.

Originally published at China Economics Blog and reproduced here with the author’s permission.