China's Debt_ Petraeus: Don't freak out over China dumping U.S. debt

CNN

September 24, 2015: 6:56 AM ET

Petraeus: Don't freak out over China dumping U.S. debt

There are lots of real threats to America -- but China selling U.S. debt isn't one of them.

That's the message from David Petraeus, the former four-star American military general, who now works in the world of finance.

"I don't think that China's sale of some of its holdings, in order to prop up China's currency, presents a security risk to the U.S. -- or a risk to our currency, for that matter," Petraeus told CNNMoney.

Petraeus is one of America's brightest minds on matters of national security. He served as a top military commander in charge of troops in Iraq and Afghanistan before becoming director of the CIA in 2011.

He resigned from the spy agency in 2012 following an extramarital affair, which has dogged him since. Just this week, Petraeus apologized to a Senate committee for his affair and mishandling classified materials.

Petraeus has since joined private-equity firm KKR (KKR) where he focuses on the intersection of geopolitics and macroeconomic trends. Earlier this month Petraeus made a personal investment in Windward, a maritime surveillance company that uses Big Data to track everything from potential terrorist activity to oil shipments.

Related: Windward: Iran is hiding more oil at sea than we realize

China dials back on U.S. debt

Petraeus doesn't sound concerned at all about China dumping U.S. debt.

"There is no shortage of customers for the purchase of U.S. Treasuries," said Petraeus.

His comments come after China -- the largest holder of U.S. debt -- raised eyebrows by disclosing a record $94 billion plunge in foreign-exchange reserves during August. A big chunk of that decline occurred due to a reduction in U.S. Treasury holdings, according to experts.

The sale raised fears in some corners of a doomsday situation where China could sink the American economy by sending borrowing costs surging as it stops lending the U.S. money by buying Treasuries.



David Petraeus resigned from the CIA in 2012 and later joined KKR, a major private-equity firm.

Related: China is dumping U.S. debt

Domestic trouble forces China to crack open war chest

But as Petraeus argues, the recent sale of U.S. debt is about China's domestic problems. China badly needed cash to offset a massive outflow of capital triggered by its currency devaluation, stock market crash and economic slowdown.

The best way for China to raise money is to trim its war chest of $3.6 trillion of foreign-exchange reserves. China owned $1.2 trillion of U.S. Treasuries as of July, putting it ahead of Japan as the biggest holder of U.S. debt.

And others agree.

"It's international economics 101. China is selling Treasuries to get dollars to buy yuan and limit capital flight," said Jim Rickards, editor of Strategic Intelligence, a newsletter focused on geopolitics and global capital.

"That's very different from financial war. None of that is going on," he said.

Related: China's factory activity skids to a 78-month low

Financial war fears overblown?

Rickards, who advises the U.S. intelligence community on capital markets, believes China's huge Treasury holdings give it very little leverage over the U.S.

"China doesn't want to trash its own holdings. And if they did anything malicious, the president could stop them with one phone call by freezing their account," he said.

Rickards pointed to a 1977 federal law known as the International Emergency Economic Powers Act that gives the president vast power to regulate commerce during times of economic stress. After the September 11, 2001 attacks, President George W. Bush used the law to block money held by terrorist organizations.

Related: China says it's ready to tackle cybercrime

Bond markets: What China sales?

The bond markets are hardly freaking out over China's Treasury sales. The 10-year Treasury yield is currently sitting at 2.14%, down from 2.5% a year ago. Yields, move in the opposite direction of bond prices, have been guided lower by the Federal Reserve's decision to keep interest rates near zero.

"Given the relative strength of the U.S. economy and the prospect of the Fed raising interest rates at some point in the months ahead, I suspect there will continue to be very keen interest in U.S. Treasuries," Petraeus said.

Related: Janet Yellen invokes China 16 times in 1 hour

Putin, Syria pose real risks

Petraeus sounds far more concerned about Russia and Syria than China's Treasury holdings.

The ex-CIA chief told the Senate Armed Services Committee this week he believes Vladimir Putin wants to "resurrect the Russian empire." He also equated Syria to a "geopolitical Chernobyl -- spewing instability and extremism over the region and the world."

Related: China has lost its economic swagger

CNNMoney (New York) September 24, 2015: 6:56 AM ET

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