China Continues To Consider U.S. Treasuries Its Best Option

A surprising change of course - that contradicts semi-official statements from only two months ago - in Chinese forex policy may bolster US treasury debt for a while. According to a front page report of chinadaily.com, Chinese economists recognize the dire state of US financial affairs that has taken root in the reckless spending of the reign of George Bush.

But having become the biggest holder of US debt as of September 2008, China apparently also accepts the fact that a premature exit out of its $585 billion stash of Treasury paper would unsettle the shaken financial world to a degree nobody wants to ponder. The report hints that China will remain a good bidder in future Treasury auctions, at these times certainly a more stabilizing act than what is coming from the US Treasury itself.

From Chinadaily:

China is likely to continue increasing holdings of US treasury bonds even after becoming the No 1 holder because it is the best way to deploy its $1.9 trillion foreign exchange reserves, economists say...

With a $43.6 billion increase in holdings of US treasury securities in September, China's overall holdings amounted to $585 billion. Japan cut its holdings to $573 billion from $586 billion in August.

Net foreign purchases of long-term US securities totaled $66.2 billion in September, up from $21 billion in August and $18.4 billion in July.

Treasury data suggests that foreign investors still regard the US as a relatively better place to invest when markets worldwide are crumbling, analysts said.

"That's why China has increased its holdings," said Dong Yuping, senior economist at the Institute of Finance and Banking affiliated to the Chinese Academy of Social Sciences.

Tough Times Ahead - But Not Many Options

Not all economists are of the opinion that China should help to blow up the US debt bubble. For the past decade China has increasingly bought US debt that helped finance its own Wirtschaftswunder based on enormous export growth that made it the biggest contributor to the US trade and current account deficit.

Once more in history the phrase "Federal Reserve Notes (FRNs) are the US currency, but a problem for the rest of the world" can be applied as the dollar still manages to hold on to its image of too big to fail. Still, China seems to be willing to lend the new president-elect Barack Obama a helping hand when he has to manage the biggest task of all: Cleaning up the mess that Bush made. After all, the most populous country in the world and the so far most prosperous nation will share a fate that depends on each other:

As the US financial crisis worsens, Washington is in dire need of capital to fund its massive market rescue plan; but some domestic economists argue that China should not use its foreign exchange reserves to purchase US bonds for fear that it may incur huge losses.

"But China may not have many options," Dong said.

The US economy, though hemorrhaging from the crisis, remains the largest and strongest; and the EU and Japan are not yet a serious challenge to US pre-eminence. Investment in dollar assets, therefore, carries the least risk, he said.

If China reduces its holdings of US debt, others may follow suit, which will lead to a weakening of the dollar and depreciation of dollar-denominated assets, thus severely hurting China's interests.

"China and the US are in the same boat," he said.

"You may not like it, but China has to move along this path," said Yan Qifa, senior economist with the Export-Import Bank of China.

And now that many countries are increasing holdings of US treasury bonds, China's potential returns from the bonds will increase, said Chen Gong, chief economist and chairman of Anbound Group, a Beijing-based consulting firm. "So China may continue to increase its holdings," he said.

However, some experts argue that Beijing use its considerable financial leverage to set conditions such as the US opening its financial markets more to Chinese funds, and allowing exports of high-tech products to China.

China faces the same problem every holder of US debt has: As the Bush regime has roughly doubled US debt to more than $11 trillion in a mere 8 years, more than all 42 previous presidents before in 224 years, the value of FRNs depends increasingly on the belief that America will somehow manage to escape a serious depression that is boldly written on the wall.

Right now the relative strength of FRNs stems largely from even worse conditions for the Euro and the Pound. I think it is safe to say that all 3 will fail as all unbacked fiat currencies before. It is only a matter of time, as it has always been.

UPDATE: Find all current developments in the bond market over at Across The Curve.

Comments

[closed:]

George Soros, who was thrown out of China for financing an attempted "regime change" in 1989, was unfortunately given voice in an interview in the Chinese economics newspaper Caijing on Nov. 1, where he peddled Keynes and green fascism. Soros admitted that he had lost a bundle on his speculation on Asia and Southwest Asia: "I thought that China and India and the Gulf States would be immune to the crisis, but they were not. That has been a source of actual loss for me -- a lot of money."

But his bets will be made good, he said, if China implements three things: political and economic "reform;" bailout of the IMF to save the banking system; and going green. China, he said, must implement a stimulus which is "directed at stimulating investment in preventing global warming, because that is a problem that is facing the world. I hope that both the US and China will introduce energy saving and alternative energy generation as a way of stimulating the economy, because that is what you need to come out of this global recession."

Soros also exposed his own fascist proclivities: "We are back to Keynes," he said. "He had the right idea for the 1930s, and these ideas have come back in a cyclical fashion, and they are right for the 21st century." Keynes, of course, admitted in the 1930s that his policies were better implemented in a fascist dictatorship like that of Germany under Hitler, and later fought to reject FDR's anti-colonial proposals for the post-war world, in favor of the revived Empire, and thirty years of genocidal warfare across Asia.

2008 Nov 21 11:43 AM

[Hmm?!:]

I agree with the Bush statement on overspending.

But it was a Democratic president who started the sub-prime debacle and Democrats in congress who stopped oversight of Fannie and Freddie.

I am a Canadian and even I saw schoolhouse rock! He stayed just a bill...........and we have our meltdown!
Be honest next time!

2008 Nov 22 10:08 AM

[InvestBaboo:]

There are unsubstantiated reports that China may move as much as its 1.8 trillion $ reserves to Gold. China has a lower % of its reserves in Gold than many countries even including the bankrupt Zimbabwe! This report appeared in China Daily and was taken off its pages very mysteriously in matter of hours.

2008 Nov 22 11:09 AM

[NOWHEREMAN:]

The People's Daily Online edition indicates China is unloading its dollar reserves faster than its taking new US debt on.

They are issuing Dollar denominated Bonds, or about $70 Billion so far. How long do you think this dollar shuffle will remain unnoticed?

2008 Nov 22 01:00 PM

[X-15:]

RATHER, some comments use this to spout political BS

2008 Nov 22 01:33 PM

[yank:]

Why would anyone buy Treasuries at these yields? You are actually getting a "negative" return when you factor in inflation. Has everyone forgotten that China will be spending $600 million on their own stimulus package? How do you think that will be financed? You are lilving in a "dreamworld" if you think China will continue to buy more Treasuries going forward. Not going to happen.

2008 Nov 22 04:25 PM

[Kelly Liebe...:]

Saudia Arabia, China, Argentina and Iran all buying gold....anybody still confused?

2008 Nov 22 06:13 PM

[Asbytec:]

China needs to finance at least 6% growth to keep the migratory flow of workers into the urban areas from reversing. How do you think they will finance that. Right, through stimulus packages funded from reserves. That's plan B.

Plan A is to do whatever it takes to keep American consumption flowing. And investing in American debt will help. They certainly do not want to deplete their reserves. Huge reserves have given them a voice on the international stage. They will not give that up lightly. As mentioned above, China will do what's in it's own best interest.

Still believe China will diversify into the euro on a massive scale? Think again, the EU is in serious, serious trouble, more so than the US. German backs are more heavily leveraged than US banks and England has no real industry outside of the financial industry.

I believe the author is dead on, in addition to the reasons I assert are true.

2008 Nov 23 09:12 AM

[Aryamehr:]

China will do what they deem is good for China as any nation will do for the interest of it ruling elite. At this moment China is doing what any rational businessman or aspiring world power would do, which is to bring order to the financial markets. Chinese goods require a stable financial system that functions efficiently if it is to continue on its glide power into a giant economic super power. A failure in the current financial system would have dire consequences for all the Pacific Rim nations, hence China is compelled to make sure that this does not happen. We basically have only two real options; you either think the world has come to an end, which doesn't matter what you do, or you think rationally and assume that this is just another macroeconomic transitions. The only difference to this recession is that it is Global and predicated on bad financial policies in the West, especially the USA. Bad leadership begets bad policies. You can thank Mr. Bush, Greenspan and Paulson for the mess we are mired in.

2008 Nov 23 02:48 PM

[Asbytec:]

Ary, I agree with you except for the last sentence. Everyone wants to blame Bush. Okay, I'll concede he could have acted more decisively. But, this thing has been building through many presidential terms, including Clinton's. It just happened to fail on Bush's watch.

As far as I am concerned, Paulson, like everyone else including Bush and Clinton, turned a blind eye as long as times were good. As long as people 'felt' richer due to the the wealth affect (which means it's just an illusion of wealth) through higher credit card limits and home equity, hey why stop the gravy train?

Its easy to look back and say the regulators should have stopped this thing, including not allowing huge trade deficits to build with China. So, one has to be careful about tossing stones. But, congress should have been all over this thing from day one. See, I see this as a money supply problem and congress has a constitutional mandate to set the price of money and reign in Greenspan.

But, we buy China's tennis shoes, they buy our bonds. That's how it works. Also, defending Bush in the slightest always earns me a "thumbs down." LOL

2008 Nov 23 06:53 PM

[Did U Think...:]

Just watch the price of gold if you want to know when people give up on treasuries. Breaking out to a new high past 1030/oz will be a wake up call to a lot of people.

2008 Nov 24 02:13 AM