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starbucks4ever (97.60)

Diversification from a frying pan to a fire

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August 20, 2010 – Comments (7)

So China is now tired of US Treasuries and is diversifying to Korean and Japanese Treasuries. I think this is a classic case when the remedy is worse than the disease. There is no argument that US treasuries are very bad, but this does not mean Japanese/Korean treasuries are any better. Especially Japanese treasuries, which look like the ultimate definition of a junk bond, but unlike the real junk bonds, they don't even pay a yield. (OK, technically, they pay a yield, but you need an electronic microscope to see it.) All the more so that Japan's economy is a mess for precisely the same reasons China's will be a mess soon: overreliance on a fictitious trade partner oversees. The last remaining creditworthines of the Japanese government is backed by the very same thing China wants to diversify away from: a stash of US Treasuries. The same inedible soup, only diluted with dog poo.

7 Comments – Post Your Own

#1) On August 20, 2010 at 12:57 PM, russiangambit (29.13) wrote:

It is a case though of having more trade with Japan/Korea than with US? You can't buy japanese bonds with USDs. So , may be they simply have more japanese yen and less usds when compared to previous years?

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#2) On August 20, 2010 at 1:38 PM, WallstreetKnight (39.44) wrote:

LOL!

China is smart.  Very smart.  While people in the west are shaking their heads or snickering, they are making the contrarian plays that will get them ahead.

Let me elucidate - by buying Japanese treasuries they are NOT hoping to 'diversify.'  Any diversification is only a byproduct.  You're forgetting that China is big enough that when they get into the figurative tub - a lot of water gets displaced.  By buying Japanese treasuries they reduce the mounding pressure for them to repeg their own currency because it affects the rates between the U.S., JAP, China.  And then there's the following effect - people WILL follow china into Japan, effectively riding on their coattails.  But this will further appreciate their position.

They effectively killed two birds with one stone.  

 

And as for Korea... I just read this: http://caps.fool.com/Blogs/the-other-korea/436016

Which seems like a farfetched, but plausible catalyst.  Who controls NKorea after Kimie?  Oh right.  China. 

 

 

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#3) On August 20, 2010 at 1:39 PM, WallstreetKnight (39.44) wrote:

Mounting pressure*  not mounding....

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#4) On August 20, 2010 at 1:43 PM, WallstreetKnight (39.44) wrote:

I almost forgot - China did not have to 'reveal' their position on Jap Treasuries.  They tipped their hand for a reason. Countries don't exactly have SEC filings, and Japan didn't let us on - CHINA basically broadcasted this development.

And I think that reason supports what I'm saying.  They WANT people to know because ...

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#5) On August 20, 2010 at 1:47 PM, WallstreetKnight (39.44) wrote:

By buying Japanese, Korean, bonds they prop up the yen, won, euro and make German, Japanese and Korean exports less competitive.

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#6) On August 20, 2010 at 5:57 PM, rofgile (99.30) wrote:

Isn't buying Japanese and Korean bonds another sort of artificial currency manipulations that raises the value of Japanese and Korean currency versus Yuan?

Seems like the kind of move that would piss off Japanese and Korean governments..

 -Rof 

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#7) On August 20, 2010 at 7:08 PM, starbucks4ever (97.60) wrote:

"Seems like the kind of move that would piss off Japanese and Korean governments"

Huh? The US government does not seem to be pissed off by Chinese purchase of US Treasuries, or am I missing something? 

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