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Home Publications Blogs Beat the Press Will an S&P Downgrade Help Geithner Accomplish His Goal of Lowering the Dollar Against the Yuan

Will an S&P Downgrade Help Geithner Accomplish His Goal of Lowering the Dollar Against the Yuan

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Tuesday, 19 April 2011 14:47
The WSJ hinted that a negative assessment of United States debt by S&P may lead China to stop buying U.S. government bonds and possibly to even start selling them. If China went this route, it would help to raise the value of the yuan against the dollar, which is exactly the policy that Treasury Secretary Timothy Geithner claims he is urging on China [thanks Allan]. In this sense, the negative report from S&P may be great news for the Obama administration and its efforts to increase U.S. exports.
Comments (8)Add Comment
Too deep for me
written by magixarc, April 19, 2011 4:44
It is subtleties like the "dumping US treasuries" due to bad long term debt in order to equalize currencies and consequently increase exports to reduce trade deficits... that leave the average citizen like me thoroughly confused and unable to actively participate in fiscal policy decisions. Will there not be some corresponding interest rate increase associated with the downgrade? Where does the average mom go to understand in simple terms how all this works? Thanks for any help
...
written by izzatzo, April 19, 2011 4:54
This is a plot by Baker to scare teabaggers with their own conspiracy so the Fed will have to buy the debt instead of China.
Raising the lowering
written by Allan L, April 19, 2011 5:21
It would promote general understanding of these issues if you could restrain yourself from using words lik 'raising' and 'lowering' interchangeably.
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China Ain't as Stoopid as the WSJ
written by paul, April 20, 2011 7:59
China won't be selling U.S. Treasuries any time soon. In fact, China's economic model depends completely on buying as many Treasury bonds as it can. China won't be helping out Obama or Timmy, that's for sure.
No Effect
written by M Mac, April 20, 2011 12:40
No, the downgrade will not directly help appreciate Yuan relative to the dollar.

First, the credit rating change will not cause the world to lose all faith in US debt overnight. The S&P downgrade was a wake up call to US government that its not infallible, but US t-bills are not damaged goods. The global confidence in US debt is still high. Credit agencies provide insight to creditors on the likelihood of a debtor’s default. The US government is a known entity with the largest economy in world, high tax revenue, government stability, transparency and most importantly a modern history free of default. For such a known entity, creditors around the world do not depend as heavily on credit agency ratings as for investing in countries with unknown default histories and uncertain government stability. There are few other safer investment options right now than US t-bill regardless of the credit ratings.

Not to mention that US is still investment grade. If US slipped from investment grade, then this would be a different conversation. I would venture to say though that in event of a hypothetical slip, China and other major US debt purchasers would already have known and made their decisions before credit ratings were released. While credit ratings have a role in the investment decision process, these major investors are not relying that heavily on the credit ratings to make the decisions. Not to mention a significant portion of investors question the accuracy of credit rating agencies following their failings before the 2008 crisis. While the point is taken that US needs to take action on its debt level, the demand for US t-bills will still stay high.

The next point is that China’s US t-bill purchases are decided by policy, not credit ratings. China made the decision decades ago to keep its exchange rate at a fixed level to the US dollar in order to grow its exports. To do so China has had to purchase massive amounts of US debt over the years. China’s US t-bills purchases are related to its economic policy focused on increasing exports, not on credit rating scores. If China changes its economic policy to look at US t-bills for purely investment, then maybe the credit rating could have an effect. However, I doubt it for reasons mentioned above. China will make its US debt purchase decisions based on its own policy and not a credit rating agency from the “west”.

Finally, China will not sell US t-bills, especially right now. China is facing the threat of inflation domestically and is signally that it will probably start to back off its artificial depreciation through US debt purchases. This should start a modest appreciation of Yuan on the dollar. If China sells off US t-bills the Yuan would appreciate at an undesirably high rate that could crash exports. In addition, because it holds so much US debt, China will be very cautious in how it lightens its holdings. China cannot simply start selling US debt without serious consequences. It is in China’s best interest to hold the US debt for now. In the future it may have to gradually shed some of its US debt, but not now. For the near future, the S&P crediting rating change will serve only to slap the US congress on the wrist and will have no effect on the Yaun.
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written by PeonInChief, April 21, 2011 8:25
The US has the same interest in a high-value dollar that the Chinese government does, that of US corporations doing business in China. The corporations get low-cost labor, and sell their products in the US for dollars. This was part of the deal that the corporate interests made with China and, of course, the US government is going along.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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