China Pushing US Interest Rates Up

U.S. Monetary Policy: Made In China? - Berkeley Professor

“The Chinese authorities have been selling foreign securities, mainly United States Treasury bonds, and buying up renminbi,” he explained. 

According to Eichengreen, there are informed guesses as to the exact magnitude of China’s foreign-exchange intervention, which suggest that it has been running at roughly $100 billion a month since mid-August.

“Observers believe that roughly 60% of China’s liquid reserves are in U.S. Treasury bills,” he noted. “Given that reserve managers prefer to avoid unbalancing their carefully composed portfolios, they probably have been selling Treasuries at a rate of roughly $60 billion a month,” he added.

The effects of this selling pressure from China, the professor continued, are opposite to those of quantitative easing.

The main concern right now, he argued, is that no one really knows how long capital outflows from China will persist and how long Chinese officials will continue to intervene.
“From this standpoint, the Fed’s decision to wait to begin liftoff is eminently sensible,” he said.

“And, given that China holds (and is therefore now selling) euros as well, the European Central Bank also should bear this in mind when it decides in December whether to ramp up its own program of quantitative easing.” 

My view:

Central banks attempting to manipulate interest rates lower are pushing the financial system to precarious position.  Seven years of ZIRP (zero interest rate policy) is catching up to the United States and the European Union.  By definition, borrowed money has an interest rate attached to it to protect the creditor from debtor default.  China is the creditor nation to much of the world, and they have been net sellers of long dated US treasuries since at least 2010.

As the United States and Europe continue to run large fiscal deficits, and devalue their currencies through stealth inflation and ZIRP, the creditor nation has found a way to indirectly force interest rates up, thereby reducing risk in the event of default.

Note that Chinese gold reserves have been officially growing substantially at the same time.  Unofficial reports and inferences from the Shanghai gold exchange suggest that actual accumulation is much higher than officials admit.

While we do not know how much longer the charade can continue that gold is a "pet rock" in the western media, or that investors should fall all over themselves to purchased overpriced stocks, we do know that this does not have a happy ending.

So as interest rates gradually rise, rather than being a sign of US economic strength, we believe it is a sign of external creditors seeking higher returns for the greater risk to their bond portfolios. In such an environment the asset with no counterparty risk does make sense, particularly at today's low prices.