China ‘Worried’ About Safety of U.S. Treasuries

yuan_zcen

http://www.nytimes.com/2009/03/1 ... na.html?_r=1&hp
By BETTINA WASSENER
Published: March 13, 2009

HONG KONG — China, the world’s biggest holder of United States government debt, on Friday expressed concern about the safety of those assets as American deficits have ballooned with costly stimulus and bailout packages aimed at rescuing the economy..

The Chinese prime minister, Wen Jiabao, said he was “worried” about its holdings of U.S. Treasuries and called on the United States to provide assurances that the investment was safe. His remarks came at a news conference in Beijing after the final session of the National People’s Congress, the Chinese legislature.

China has the world’s largest reserves of foreign exchange thanks to years of double-digit growth in the years that preceded the financial crisis that began in the United States in 2007. Beijing has been deploying much of its reserves in increased purchases of U.S. Treasuries and the financing of major investment projects designed to prop up flagging growth at home.

Analysts estimate that nearly half of China’s $2 trillion in currency reserves are invested in U.S. Treasuries and notes issued by other government-affiliated agencies.

Those Chinese investments have helped assure the stability of the U.S. Treasury market despite the economic convulsions of the last year, and some economists have warned of alarming consequences should the Chinese investments stop propping up the market for American public-sector debt.

During her visit to China last month, Secretary of State Hillary Rodham Clinton sought to reassure Beijing that those holdings remained a reliable investment.

Mr. Wen sought added reassurances on that front on Friday, calling on the United States to “maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”

interesting

The US has never not paid its bonds in the course of 200 years, even at the beginning when its bonds were in gold and it had no money, it found a way to scrape together the amounts. In fact, Hamilton is more widely heralded for paying US war debts than for his actual heroism in the war itself.

Wen is just saying stuff for no reason. I'm sure China is miffed, since it has to keep buying to keep the currency peg in place, but it has no return with bonds selling at or near par.

idiot8

japan has nearly the same amount invested in US debt as China does and it isnt saying anything.  From the looks of it Japan is in worse shape than China so what gives?

satsu_jin

Originally posted by idiot8 at 2009-3-13 16:55
japan has nearly the same amount invested in US debt as China does and it isnt saying anything.  From the looks of it Japan is in worse shape than China so what gives?

There is still a difference, isn't it?  Does Japan really have a choice? Just imagine the scenario if they withdrew this money.

emucentral

Originally posted by totothedog at 2009-3-13 20:49
Never deal with them unless you really, really have to and then make sure you get what you want before handing over anything.

Obviously the Chinese leadership aren't listening to fools like you, Toto.

Da_Zhao

This problem is going to solve itself rather shortly. Although whether everyone will be happy with the result is a different matter...

China does not need to keep buying $ to keep its currency in place. The currency is held in place due to capital controls. Westerners are not allowed to bring capital into the PRC (and thus into yuan) unless they have a permit. That is enough for that function.

The reason that China has purchased so many US Treasurys is that it has run a fairly large merchandise trade surplus for the last few years. That surplus would either need to be repatriated back to China or kept in $. Most PRC firms do a combination of both. The $ that are retained are then invested in US$ denominated assets, be they Treasurys, agency bonds (mostly Fannie Mae and Freddie Mac), corporate bonds or direct investment (property, stock). Treasurys have historically been the most popular sas they are the lowest risk, although the PRC is also believed to be the largest creditor to Fannie and Freddie.

Now it is not well known in the West, but historically China has actually not run large trade surpluses - this is in direct contrast to the so-called export oriented model of development that the ROK and Japan utilized. In fact as recently as six years ago, the PRC had no trade surplus. The outsized trade surplus of recent years can now be easily recognized as a side effect of artifically (and unsustainably) high consumer spending in developed countries, particularly the US. As those economies return to more sustainable levels of consumption, China's trade surplus will fall. By a LOT. And we've already seen it. I suggest you look at the PRC's Jan trade numbers. Run rate merch trade surplus if off by some 90% vs. year ago numbers. With these smaller trade surpluses, the question of whether to buy more Treasurys will be moot. There will simply be no need. Add to that the fact that China is now running a large gov't deficit of its own that requires funding, and it is easy to see that what little additional capital comes from the trade account will simply be utilized domestically. That is not to say that China is short of capital. China has gazillions of $ of Treasurys maturing every year for the next 30 years. But it is likely that will be rolled as the US Treasury refinances its maturing debt - it won't be available for new funding of the current gov't deficit.

It's ironic, but the scenario that some US politicians have hoped for, no demanded, namely an end to China's trade surpluses, is near. The only thing that could stop China's trade surpluses was the only thing that created it - jacked up demand from Western consumers. But now that era is drawing to a close, what replaces it is an era of reduced capital availability for everyone. It's just that the first to feel the impact will be those that are the most capital constrained. And that would be the US first and foremost.

interesting

Da,

The primary potential source of dollars in China would still be export proceeds were the capital controls removed.