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China should seek guarantees that its $682 billion holdings of U.S. government debt won’t be eroded by “reckless policies,” said Yu Yongding, a former adviser to the central bank.
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You may recall from my post yesterday that the Fed is going through public motions about finding ways to ward off inflation while quietly preparing to inflate the dollar away with massive purchases of U.S. Treasuries. China is signalling that it will have none of this gamesmanship. That big red dragon wants some kind of iron-clad guarantee that the U.S. will not inflate away its debt obligations. China's "nuclear option" is a financial WMD.
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China is demonstrating its aptitude at applying the concepts outlined in Unrestricted Warfare, a book that should be read by anyone who really wants to understand the delicacy of U.S. relations with China. China's ownership of U.S. debt gives it a powerful bargaining chip when negotiating with the U.S. over solutions to Great Depression 2.0. Expect concessions from the U.S. on trade in exchange for continued Chinese purchases of Treasuries. China's master plan to supplant the U.S. as the world's dominant power is coming along just fine.
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Nota bene: Anthony J. Alfidi is long FXI (with covered calls).
