Mostly correct except the treasury holding are in a range of maturities such that only the ones coming due can be cashed in or in essence traded for dollars. Beijing would then have dollar balances they would have to do something with and the Fed would have to sell more T-bills to make up the cash in. The only think that Beijing could do with the cash is buy property or businesses but in either case there would be a run up in prices.
Although investors hang on every comment by Federal Reserve Chairwoman Janet Yellen to get insight on the direction of interest rates and what it means for the economy and asset prices, the real power to determine U.S. interest rates may be in the hands of China, according to Lombard Street Research. Facing an overvalued currency that is hurting corporate profits and slowing growth, China appears ready to dump its $1.3 trillion in U.S. Treasury bonds to drive U.S. interest rates up and strengthen the dollar.
The secret to China’s spectacular growth beginning in the early 1990s was devaluing its currency to the U.S. dollar from 2.8 Chinese yuan to 8.7 yuan. The devaluation cut the cost of Chinese labor by 68% and launched the cheap labor manufacturing boom. Exports as a percent of GDP grew from about 13% in 1994 to 39% of GDP in 2007.
With the export boom…
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