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Tuesday, November 6, 2018

The more the US tries to hurt China, the more it will hurt itself. Why?

The US doesn't realize that its economy and China's economy are deeply intertwined in this globalization era.

The US imports a lot of China goods and causes China to accumulate a lot of USD in which China uses to purchase the US treasuries as there is no other financial market to absorb the huge quantity of USD investments.  This is the rationale behind China being the largest foreign owner of US treasuries.  However, the largest owner of the US treasuries is actually the US FED.  This financial connection between the US and China has been working well because the US government can continue to finance its huge deficit to boost the US economy as China will always be a substantial buyer. Alas, all good things must come to an end and Trump is the president who will try to end this with his warped economic concepts.

Trump is trying to punish China by destroying China's economy with punitive tariffs.  If China economic growth starts to slow down steeply, there will be capital flights and this will cause the Chinese yuan to depreciate faster.  In order to stabilize China's economy, the Chinese government will need to buy the Chinese yuan by selling the USD.  As there is a shortage of USD in the global market now including China, China will be forced to sell its US treasuries to get USD to buy the Chinese yuan.  Subsequently, this will cause US interest rates to go up tremendously and saddle the US with higher interests.

Furthermore, China will also buy lesser US treasuries when its coffers are no longer as well stocked as before.  This will definitely increase the difficulties for the US government to raise fund as there is no other substantial buyer like China.

http://sg-stock.blogspot.com/2018/10/usd-has-supply-shortage-now.html

The US government also tries to curb China's technological industry.  However, this will only prompt China to develop and ramp up its own chips production faster, thereby, causing future chip sales losses in foreign chips manufacturers.  In the end, the US chips industry will suffer.

http://sg-stock.blogspot.com/2018/10/the-global-semiconductor-slowdown-is.html

I've only stated some simplistic relationship between the US and China for our viewers to understand but the connection is more deeply ingrained.





1 comment:

Eric Ho said...

https://sg.finance.yahoo.com/news/chinas-reserves-fall-suggesting-beijing-103415013.html

China is selling US treasuries to prop up the yuan.