This is the absolute worst case scenario. China has been propping up the US economy for years, allowing it to wage wars and keep up consuming. For China to get rid of its US dollar denominated debt is a watershed action. The day of the total collapse of the western financial system is nigh. Bank of China has cut its portfolio of securities issued or guaranteed by troubled US mortgage financiers Fannie Mae and Freddie Mac by a quarter since the end of June.
The sale by China’s fourth largest commercial bank, which reduced its holdings of so-called agency debt by $4.6bn, is a sign of nervousness among foreign buyers of Fannie and Freddie’s bonds and guaranteed securities.over the mortgage financiers’ capital positions and the timing and structure of a potential government rescue has made some investors reassess their exposures. Asian investors in particular have become net sellers of agency debt, said analysts.
Federal Reserve custody data shows that for the year to July, foreign official and private investors bought an average of $20bn of agency debt a month, including debt issued by other government agencies such as Fannie Mae and the Federal Home Loan Banks. Purchases of US Treasuries averaged $9.25bn.