Why China Affects Your Mortgage Payment
So treasury rates set a floor that forms the basis for other long-term rates?
That's right. Treasuries set a floor. But keep in mind, mortgages are different from other types of loans. Credit-card rates are much higher because there's no collateral. The collateral of a home helps keep mortgage rates lower, but still, the collateral of a home is not the same as the collateral of the U.S. treasury.
Let's talk about some of the dire scenarios people worry about. What would happen if China suddenly decided to sell all of its U.S. securities?
They'd simply sell their securities in the marketplace, which means the yield would have to go up because prices would drop. It would be like a fire sale, where you have to drop the price to sell everything quickly. But that would be bad for China. If they did that, of course, they'd be getting less than they paid for the securities. That would be foolish. And the U.S. would be upset. It would be taken as a sign they are trying to harm the U.S. economy. And then, what would they do with the money? They'd have to purchase other-denominated securities. And that could be riskier for them.
If China sold all those securities, would the markets go into a tailspin?
Not necessarily. Other people would emerge to buy them, and the market would equilibrate.
Would it cause a recession?
Hard to say. It would certainly be a big enough move to get everybody's attention. And China would still have to figure out what to do with all the dollars it takes in through the exports it sells to us. What do they do with the cash?
Is there anything else China could do with its money, besides buy securities?
Sure. They could buy Wal-Mart or Citigroup. They have enough money. They could afford to purchase one of those. Now do you think the U.S. Congress would be happy about that? Do you remember what happened when they tried to buy the oil company Unocal? And think back to Japan in the 1980s. They had the biggest banks in the world and started buying all this real estate in the U.S. Then there was a crash, and they had to sell much of what they had bought.
How do exchange rates affect all of this?
On July 21, 2005, China allowed the yuan to appreciate for the first time in years, by 2.1 percent. Since then, it has appreciated another 3 percent. So that's 5.1 percent appreciation since July of '05. Most people think the yuan is still undervalued, which makes Chinese imports to the U.S. even cheaper. Sen. [Charles] Schumer's bill says it's undervalued by 28 percent, and that was before the 5.1 percent appreciation, so if he's right, the yuan is still undervalued by about 23 percent. As the value of the yuan goes up, it will make Chinese goods more expensive to Americans. And if we have to give up more dollars for the same goods, we're not going to buy some of them. So more appreciation of the yuan means China will export less, and our trade deficit with them will go down.
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