Dollar-denominated risk assets, including asset-backed securities and corporates, are no longer wanted at the State Administration of Foreign Exchange (SAFE), nor at China’s large commercial banks. The Chinese government has ordered its reserve managers to divest itself of riskier securities and hold only Treasuries and US agency debt with an implicit or explicit government guarantee. This already has been communicated to American securities dealers, according to market participants with direct knowledge of the events.
Part of the problem is the the U.S. is too restrictive in allowing the Chinese and other holders of dollar denominated assets to convert them into equity holding, the economically logical result of excess borrowing with no clear path for repayment. But the Chinese know that this is a sensitive issue, as the CNOOC/Unocal fiasco demonstrated five years ago. So they must circumvent. How much longer this has to go on depends on many things, but the more the U.S. borrows the sooner the day of reckoning comes.