China Backs EU Debt, Sends Stocks Rocketing

Dow futures jumped 200 points on this news. I'm surprised we haven't seen stocks jump 400 points.

This, however, is troubling in many respects. China has its back against a wall. I have no doubt that Timothy Geithner had his hand in this. He no doubt went to China to persuade China's leadership to make just such a statement. He told them that in the short term, it would be in their interest to make such a statement, and he was right, but only in the short term. If they hadn't, and had indicated a desire to liquidate its bond holdings instead, the world's bond markets would likely have collapsed, with interest rates skyrocketing and investors the world over dumping bonds of all types, including even US Government debt. It would have caused interest rates on corporate bonds, munis, foreign and emerging market bonds, throughout the world to skyrocket. It would have sent the stock market reeling, because the higher interest rates would have sent shock waves world-wide. The value of China's bond investments would have plummeted.Geithner's effort, however, has only bought time. It has not prevented a disaster; it has only delayed one.

Chris Martenson, on his blog, wrote an excellent article documenting that China holds, mostly through foreign banks, about $5.7 trillion of U.S. government debt. That's about 43.8% of all U.S. government debt. If it indicated that it would begin selling European-denominated debt, it would immediately raise the expectation that it would likely begin dumping U.S. debt also. The consequences would be the financial equivalent of a world war!

The bottom line is that China had no choice. It's back was against the wall!

But -- and this is the scary part -- what does this say about the state of the world economy and the stability of the global financial markets? If we were so precariously perched on the edge of the cliff that Geithner felt compelled to travel to China to persuade them to make such a statement, then it says something very perilous about the state of global finance. It says that we're closer to the edge of the cliff than anyone imagined!

China must be shaking in its boots right now. China's leaders must know that if the world suddenly loses confidence in European or other bonds, the world bond market could collapse almost overnight! it could lose trillions in value and send the global financial markets reeling in what could only be called an catastrophe of biblical proportions.

Rather than paying attention to what China says, we should focus on what China does! Over the past year or so, China has been reducing the amount and duration of its US Government debt holdings. It has been buying and stock-piling commodities of all types.  It has been buying large quantities of corn and soybeans, for example. The USDA makes frequent announcements of grain sales. In recent weeks, China has been buying surprisingly-large amounts of corn. China has been buying huge quantities of soybeans for several months. In fact, soybeans purchases are of such size that it would outstrip the supply of American beans, even if the USA has a bumper crop this year! The only thing holding back the price of beans from skyrocketing is the fact that the USDA continues to under-report soybean purchases from week to week. China is trying to put its assets into gold and other hard assets while slowly backing away from sovereign debt of other countries.

China has not averted a disaster. It has only delayed it!

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BEIJING -- China's foreign-exchange regulator, in an unusual clarification, denied that it is reviewing its holdings of euro-zone debt, saying Europe will remain one of the key investment markets for China's foreign-exchange reserves of nearly $2.5 trillion, the world's biggest, despite the euro-zone debt crisis.
The direct rebuttal of a Wednesday Financial Times report by the State Administration of Foreign Exchange, an agency which rarely answers questions from the media, highlights China's awareness of how volatile financial markets have become increasingly sensitive to even hints about how Beijing deploys its enormous ...