Monday, June 8, 2009

China looking to hedge its dollar risk?

With record federal deficits and debt-to-GDP ratios rising, Chinese government officials – who hold around a tenth of the total U.S. public debt – are apparently getting concerned that a dollar decline could leave them holding the bag. The U.K. Telegraph reports that the director of China's number two bank said the U.S. government should start issuing bonds denominated in Chinese yuan. Unlike dollar denominated debt, debt issued in the currencies of former countries would face less risk in the case of dollar devaluation or inflation. Of course, the threat of outright default, or of assistance from the IMF, would increase. With debt-to-GDP ratios projected to rise to 85 percent and higher, it's becoming clearer that our foreign lenders are getting concerned about the U.S. fiscal gap, even if Congress and the administration seem somewhat less bothered.

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