re: “Would it start dumping U.S. Treasuries? Not a Chance…It would reduce the value of the Yuan, something China can’t afford…China needs to buy dollars to prop up its currency.”

While I agree China will not likely dump the Treasury bills…I totally don’t understand the rationale here. Correct me if I’m wrong, but perhaps I am confused about a few things :

a. If China dumped U.S. Treasuries, it would seem to me that this will not reduce the value of the Yuan. This will just convert their US Treasury related investments into USD.

b. If China dumps the USD, I agree they could not afford this because they may cause some panic in the world economies, as the USD is suppose to be a safe haven…and this is the last thing anyone wants. Also, it seems to me that this has nothing to do with proping up their Yuan rate…this has to do with the 2T of foreign reserves they have on hand, of which probably more than 70% is in USD Treasuries…actually it’s likely a lot more. One proxy, is you can guess what type of currencies they may be holding by understanding where SAFE ((the STATE ADMINISTRATION OF FOREIGN EXCHANGE) – responsible to the Central bank for managing all foreign reserves in China) have operations managing the foreign reserves. There are 5 locations, 4 are outside of China.

c. “China needs to buy dollars to prop up its currency” – I’m not sure what you mean by prop up…if you mean keeping the Yuan rate high…then that doesn’t make sense to me…they are buying USD to keep their Chinese Yuan low. The ironic thing is that the US is pressuring them to revalue which will mean they would have to sell the USD…but if they continued to buy USD (due to trade surplus & FDI), they could continue to keep the Yuan articially low to help keep exports competitive.

Seems to be a logic gap somewhere.

Rgds