Beijing-based Wall Street Journal reporter Andrew Batson had an excellent blog post yesterday. He calls attention to a news story I noticed earlier this week, that China’s purchases of U.S. Treasury debt are rising once more.
About a month ago, official newspapers in China trumpeted the fact that China had reduced its net holdings of U.S. Treasuries by $25 billion over the course of June. This decrease was depicted as evidence that China was finally fed up with the U.S. and moving to divest its dollar holdings, as it had subtly threatened for so long — a view that found ready acceptance by some in the U.S. At the time, I argued that this was simply not the case. As Batson correctly observes:
The reality behind the noisy public debate is that China has little choice. Because the nation still runs a large trade surplus – although a smaller one this year – it has to find somewhere to put large amounts of foreign currency every month. The U.S. debt market remains the best and only real option. If China really wanted to cut back on its purchases of U.S. debt, it would have to take steps to reduce the size of its trade surplus: most obviously, letting its currency appreciate again. Most economists think that’s unlikely to happen while China’s exports remain depressed.
In fact, what seemed to be taking place in June was a restructuring of China’s portfolio, from short-term to long-term Treasuries. Following the passage of TARP in October 2008, Chinese holdings of short-term Treasuries ballooned significantly. In June, China finally reversed the buying trend and sold $52 billion of this short-term debt, a mere fraction of the holdings it had accumulated. In the same month, it actually expanded its holdings of long-term Treasuries by $27 billion.
Lumped together, these two June figures explain the $25 billion drop-off. But there were two separate trends taking place, not one. Some observers even speculated that, far from China “dumping” U.S. debt, China’s shift from short-term to long-term holdings might actually indicate its reemerging confidence in the U.S. economy. In any event, they noted that, if China truly intended to “dump” U.S. Treasuries, it would hardly call attention to the fact for fear of triggering a collapse in the value of its sizeable remaining portfolio. Official news reports touting the sell-off smacked more of public relations that real financial policy.
Now, on Wednesday, comes news that China’s net holdings of U.S. Treasury securities grew $24 billion in July. Figures indicate China expanded its holdings of both long-term Treasuries (by $15 billion) and short-term notes (by $9 billion). Total Chinese holdings are still $1 billion shy of the all-time high at the end of May, but if these trends continue we should be looking at China reaching new heights in coming months. As Batson points out, this flow of funds is not a question of choice or policy, it is an unavoidable function of China’s existing balance of payments. If China wants to sell exports for dollars, and permits few other outlets for Chinese citizens to reuse those dollars, it has to do something with them and Treasuries are its last option.
Batson’s post also highlights how befuddled many of China’s more nationalist economic commentators and journalists are when confronted with this reality. They simply can’t figure out why, given its newfound supremacy, China simply doesn’t lay down the law and cut off those profligate Americans. Their confusion reflects a fundamental — but highly prevalent — miscomprehension of both the dynamics and the fragility of China’s economic success.