Loan Modification

The Chinalco/Rio Tinto failure will motivate a new course in China policy to spread portfolio risks via diversification. They have decided, with the hedge fund approach, to use a double pronged phalanx approach. They will invest tens of billion$ to acquire hundreds of exposures across a broad range of companies in the West, under managed portfolios. They will undercut the politically motivated financial attacks against those hedge funds themselves. If the USGovt defies Beijing, then the great creditor can yank a cord and deny USTreasury Bond purchase until the vassal turns more obedient.

China will not openly sell the USDollar, which means openly dump their USTreasurys and USAgency Mortgage Bonds. Doing so would constitute an open declaration of financial war, thereby destroying the value of its reserves and inviting open war with the US. Instead, China will continue to encircle the USDollar, to encircle the vast supply chain, and pursue what should be regarded as a tight noose around the neck of the USGovt and USEconomy. Call it a pair of leashes as they walk the dog of war. Recent efforts to establish the Chinese yuan currency as a global reserve alternative have proven effective. See the landmark deal with Brazil. Settlement of international transactions will more often be completed in currencies outside the USDollar sphere. What we are witnessing is a death of the USDollar by a thousand cuts, a Chinese torture tradition. The Beijing leaders have decided, for political and practicality reasons, to employ the Gradualist Approach.