It is perhaps a good time for the befuddled world to start considering building a de-Americanized world. --Liu Chang, Xinhua news agency
The American press is up in arms over an op-ed piece published in China's state-sponsored news agency, Xinhua, which calls for a "de-Americanized" economic world. The article focuses on Washington's failure to reach a compromise on the ongoing Federal government shutdown and its potential global consequences. The fact that the piece was published by China's official news agency seems to indicate the government's endorsement of this opinion.
Should this threat be taken seriously? Rest assured, China isn't just talking about a de-Americanized global economy, and it is doing something about it -- at least in terms of currency. The country struck two major deals recently, both of which are designed to eliminate the U.S. dollar from certain transactions.
On Friday, the People's Bank of China signed a $57 billion currency swap agreement with the European Central Bank. This will allow European and Chinese firms to settle transactions in their local currencies, instead of using the current method of settling in U.S. dollars. The PBOC reached a similar deal with the Bank of England in June. The agreements bolster yuan liquidity and are designed to facilitate a greater role for the currency in global economy.
The deal with the U.K. is particularly important, as more than a third of the world's forex transactions originate there, according to a survey by the Bank for International Settlements. It's a key battleground for establishing the yuan as a truly global currency.
How would U.S. equity markets react to the mere thought of tapering $85 billion of monthly Fed purchases? The threat of a reduction of $10 billion or $15 billion per month would be enough to shake investors. Because of the shutdown, this fear is currently on the backburner, but it could re-emerge.
Now consider that China is holding $1.28 trillion of U.S. Treasuries. That's a huge investment, and one they may wish to reduce if this talk of de-Americanization is to be taken seriously. Dumping Treasuries is not in China's interest, as it would reduce the value of their holdings. However, if China adds to this position at a reduced pace, it may result in upward pressure on U.S. interest rates.
To put it in the most basic terms possible, what if someone who owed you a huge sum of money was to consider missing a payment? If you knew that the individual in question had the ability to pay but was unable to get their act together, you'd lose patience, too. You might even re-consider your decision to lend money to that individual in the future. If our neglect of our own finances were to result in China slowing its purchases or reducing its holdings in U.S. Treasuries, the long-term effect could be much more deleterious than mere tapering.