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China and US Treasuries

soddy1979 · 2011-07-28 14:23:19

I understand that China purchases US treasury bonds and notes to maintain the peg against the Yuan. What I don't get is, what happens if the yield the market charges on the treasuries rises and therefore the value of these holdings decreases. In the short term, I guess it has no effect on the current exchange rate. I…

28-07-2011 2:23pm

#1

soddy1979

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Join Date: May 2008

Posts: 254

I understand that China purchases US treasury bonds and notes to maintain the peg against the Yuan. What I don't get is, what happens if the yield the market charges on the treasuries rises and therefore the value of these holdings decreases.

In the short term, I guess it has no effect on the current exchange rate. I suppose it only effects the long term ability of the Chinese Government to control the peg, should the Yuan have a significant decrease in fundamental value versus the Dollar, because the Chinese Government will be able to buy less Yuan as they dispose of treasuries. Then again, this should be mitigated by the fact the Yuan would be depreciating versus the dollar.

Anybody care to explain whether my thinking is correct or flawed here?

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