How Will China's US Bond (Yard) Sale Affect the US Market? 5 Top Economists Weigh In.
China, along with a series of central banks worldwide, is unloading US government bonds at the fastest pace on record, the most dramatic shift in the $12.8 trillion Treasury market since the recession. What will it mean for the US economy and the real estate market at large? We polled some of the country’s top economists to find out.
"For the US economy, you will have some negative impact to the broad US economy. I think it could shave a few decimals off the GDP growth just because China will be buying less US product. The wobbliness of the US economy is also tipping the Canadian economy into a recession so the Canadians will have less income to buy US investments. US GDP growth will be maybe shaved by 0.25%, so there is an impact.
On real estate, there are two forces operating. With China's stock market crash, the economy is slowing so there is less financial capacity to buy properties. Given the uncertainty in China, the wealthy Chinese people may want to take money out of China and park it here in the US, where they find it safer and much more stable. So there's two opposing forces. I'm not sure which will take predominance over the other but there appears to be more interest among the Chinese wanting to buy properties here in the US ever since the stock market. One hindrance is capital control; they are having trouble pulling money out of China, like what is the legal amount of dollars they can pull."
"For years the Chinese government has been accused of artificially manipulating the Yuan for export promotion—artificially keeping it low through the accumulation of foreign currency in the form of bonds. Yet today the situation is reversed, indicative of the seismic shift the global economy is going through right now. The Chinese Central Bank has been selling off reserves in what seems to be an active attempt to keep the value of the Yuan up vis-a-vis the US dollar.
"It's hard to guess why policymakers in China have changed course so sharply in recent years. Perhaps they feel that working to make the Yuan a true global currency is worth the short-term cost of being less competitive in the global markets. Equivalently the government there may be worried about the potential impact of the rising cost of imports.
What is important to remember is that the Chinese government is being reactive, not proactive. The downward pressures on the Yuan is being driven by the flight of capital from the mainland to the rest of the world as it seeks stable returns in a more predictable legal environment. As such, maintaining the higher value of the Yuan is only serving to keep this flow moving. If the Chinese Central Bank changed course and allowed the Yuan to fall, only then would this wave of capital slow down as the ‘price’ of foreign investments would rise for those buying in the Chinese currency."
"All things equal, you’d expect China’s sale of US government bonds to put downward pressure on bond prices and upward pressure on interest rates and inflation in the US. But we’re not seeing that because all things aren’t equal. China and other emerging markets are reducing their stockpiles of US Treasuries because they are trying to protect their own currencies from falling too far too fast against the dollar, which has negative consequences for governments and private companies trying to repay dollar-denominated debts with their devalued domestic currencies. But with US inflation already too low, global growth slowing further, and the Fed still dithering on raising short-term interest rates, there’s little to no upward pressure on interest rates and still plenty of buyers for the US bonds that China is selling. So I don’t think it means much for the US economy in general or commercial real estate in particular at the present time. If emerging markets continue to sell US Treasuries at the same time that the US economy gains more momentum, you could see those forces conspiring to push interest rates higher—which would have mixed effects on CRE, with stronger economic momentum being a positive for the leasing markets but rising interest and cap rates being a drag on the capital markets."
"This is the question of the day. Clearly there are some bumps in EMs. What the effects will be for the US economy is unknown. On one side is the guess that capital flows to the US will slow. On the other side is the view that existing pools of capital in the EMs will look to the US for better returns and diversification, thereby increasing or maintaining flows. I lean to the latter view for the next year or so, but it's only an informed guess."
"The Chinese are rebalancing their portfolio. The sale of US Treasuries will have minimal impact on the US economy and US real estate markets in the short run. If this trend continues for an extended period of time, then it could have an impact. The current sales will have limited impact."
