When it comes to the potential failure of the US economy and banking system, China has an especially large dog in the fight. The central government and a number of large banks own hundreds of billions of dollars in US Treasury notes and paper from companies including Fannie Mae (FNM) and Freddie Mac (FRE). An American disaster could turn into one for China as well.
According to Reuters, "speculation is swirling that Beijing could also chip in with a vote of confidence by pledging to hold onto its vast dollar assets and even buy more to help fund the massive bailout of the U.S. financial system now under way."
The communists have become capitalists and they would like the transition to work out.
While China’s motives may be selfish, they may work. One of the greatest fears within the US financial system is that the government of the world’s most populated company will succumb to despair about the American banking system and dump securities to save itself. Since US shareholders are in the midst of selling off US stocks, even at historically low valuations, a Chinese move to get out before things get worse is not out of the question.
If China gives the US economy a thumbs up, it may be one of the keys to stabilizing the markets.
Douglas A. McIntyre
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