Wary Of US Debt, China Shifts Gears On Investment
20 May 2009
BEIJING: China has engineered a subtle yet significant shift in
the investment of its foreign exchange reserves, a sign of how
it is willing to act on concerns about financing an explosion of
US debt.
Beijing has been far and away the single biggest foreign buyer
of Treasuries over the past year, but this apparent vote of
confidence belies how it has turned its back on long-term US
debt in favour of shorter maturities.
China move to the shorter end of the US debt spectrum is a
defensive tactic adopted by the wider market as well on the view
that the United States will have to raise interest rates down
the road to control inflationary pressures when the economy
recovers from the financial crisis.
But the shift also comes after pointed comments from Beijing
expressing worries over the security of its US investments and
calls from Chinese government economists for a tough line with
Washington in return for continued access to loans.
The United States is making policy decisions purely according to
domestic considerations and is giving little thought to the
outside world, said Zhang Ming, an economist at the Chinese
Academy of Social Sciences (CASS), a leading think-tank.
This being so, the Chinese government should prepare its
defences, he said. We can keep buying US debt but we have to
attach some conditions.
But China leverage may be limited, despite sitting on the world
largest stockpile of foreign exchange reserves at $2 trillion.
The very surge in US debt the Treasury plans gross issuance this
fiscal year of $8 trillion means China heavy buying is
increasingly looking like a drop, albeit a very big one, in the
ocean.
Beijing has also taken pains to stress that, while uneasy about
the us economic outlook, it views Treasuries as a safe
investment. And it knows that it would lose a lot from a
plunging dollar with so much invested in the US already.
So rather than cut off financing for the US record budget
deficit for this fiscal year, China has instead, little by
little, shifted its buying out of longer-term bonds.
Between August 2008 and March 2009, China bought $171.3 billion
of bills, debt that carries a maturity of up to a year, compared
with just $22.9 billion of longer-term notes and bonds with a
maturity of two years or more.
