17 února 2010

17/2 Tension between US & China

Mads Kofoed, Market Strategist, Saxo Bank

Relations between the US and China have undergone some tension lately, mainly due to the US warship in Hong Kong and the forthcoming meeting between Obama and Dalai Lama. What impact could these events have on capital markets? Is China going to do anything against the US that could potentially harm the US economy?

We don’t believe that China is going to do anything harmful to the US. The two countries simply benefit too much from each other to throw that overboard. However, we can understand that people ask these questions. Yesterday we found out that China had sold off some of its US debt and that Japan therefore had overtaken China as the largest holder of US debt. Taking these numbers at full value – which you shouldn’t necessarily do since China is known for buying debt through other channels – if sure does look like China is diversifying its portfolio slightly, but they are still a large holder of US debt.

While China could potentially wreck havoc with a large selloff in US debt, we as stated do not believe that will do such a thing since it would also hurt their own economy if the US lands in new economic troubles. Remember, that the US is a large buyer of Chinese produce, and China experienced a rapid and severe drop in exports when the recession set in globally.

So no, at present we don’t believe China will do anything to harm the US economy. China is still as dependent on the US economy as the US economy is on China‘s.

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