Firstly, the bond market is exactly that - a market. So for a market to operate there must be a buyer and a seller and if China was selling large parcels of bonds on the open market then there must be a buyer.
The principles of supply and demand would tend to indicate that a downward pressure occurs when supply is increased; however, the doomsday predictions are not yet eventuating as the sales are being absorbed by a number of buyers.
Chinese foreign exchange holdings are falling due to the exodus of cash overseas, by selling US treasuries, foreign exchange reserves are being replenished. The US bond market is easily the most liquid in the world.
The post GFC environment requires banks and financial institutions to hold Tier 1 capital as required under the Basel III Accord. Most expected the majority of US treasuries to be purchased by central banks, this may not be the case.
With the end of quantitative easing where central banks were purchasing bonds instead of selling, there appears to be plenty of capacity in the market to absorb these bond purchases.
The low interest rate environment has aided bond markets; however, in the longer-term, rates are expected to rise making longer dated bonds less attractive. The US sharemarkets have had a pretty good seven year run.
A number of commentators believe this trend to continue for another two years based on the change of government and proposed infrastructure investment - I am getting nervous. The US sharemarkets have recovered from the GFC era unlike the Australian sharemarket that has not yet reached the highs of late 2007.
Chinese nationals appear to be moving money out of China and into international real estate with countries such as the United States, Australia, Canada and the United Kingdom among others as leading real estate markets.
In Australia, Chinese real estate investment (especially in the apartment market) is showing no signs of abating as prices in the Sydney and Melbourne apartment markets skyrocket. The depreciating Australian dollar makes such international purchases more cost attractive.
No doubt, a depreciating US dollar would also make relative US residential property investments more affordable, but I don't think this is the intention of the Chinese authorities.
But why do Chinese investors want to invest in international real estate after the Chinese government invested heavily in the domestic Chinese real estate market in the last decade?
A bubble has appeared in Chinese domestic real estate, researching Chinese residential property price graphs indicate a high degree of volatility over that time period.
I am reading plenty of contradicting analysis though, some economists believe the Chinese domestic residential property market is on the brink of collapse with dire consequences predicted for not only the domestic Chinese property market but worldwide growth as well.
I have asked a number of Chinese nationals involved in business if these ghost cities really exist as reported in the international media and I have been informed that this is indeed the case.
Asians in general are typically good savers, a more affluent Chinese population generally saves well and seeks real estate as an investment. The risk attached to Chinese residential property is high and investors are seeking to purchase international residential property to reduce exposure to the domestic residential property market.
The Chinese sharemarket is pretty volatile with plenty of restrictions imposed on investors. So, an outflow of cash is occurring in China despite the authorities clamping down on capital outflows.
The Chinese central bank is selling US treasuries to rebuild foreign currency reserves and the US bond market is liquid enough even after the quantitative easing period to absorb such sales.
Chinese money is pouring into international residential property markets pushing prices to unsustainable levels but you can't blame the Chinese, they are getting worried about domestic policies and seeking the relative safety of overseas property.
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