Thursday, February 10, 2011

China Advised to Sell Off It's Holdings of U.S. Government Debt

As reported by the WSJ, popular Chinese economist Lu Zhengwei, a senior economist at China's Industrial Bank Co. has advised that China sell off it's $500 billion in GSE (government-sponsored enterprises) holdings before the end of the Fed's QE2. Lu Zhengwei pointed out the risk of holding these securities, issued by U.S. government-controlled mortgage giants Fannie Mae (FNMA) and Freddie Mac (FMCC), and suggested that China sell the securities soon.

In many ways this news does not come as a surprise as many top economist have been warning of this for some time. It has always been a looming fear that the Chinese government would start to sell off this debt which would deliver a death blow to our already faltering economy. Lu Zhengwei also raised concerns that once QE2 end there will be a collapse in the US bond market.

The big question now seems to be whether or not the Chinese government will heed the warning that has been delivered to them. The Chinese government has been slowly reducing its exposure to US debt over the last few years but not to the point that it has sent warning signs through the bond market. If the Chinese government does heed the warning of Lu Zhengwei and commit to quickly selling its debt holdings it could spark a quick sell off in the bond market.

This is a clear warning sign that the Chinese have had enough of Bernake's QE program and are quickly loosing faith in their investment.