Mon, May 18, 2009 page10

• China still buying US Treasury bonds

  NIGHTMARE SCENARIO: Analysts say that never before has a country as rich as the US relied so heavily on a country as poor as China to finance its economic output

  • AFP
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  China is pumping more money into US Treasury bonds, recent data show, despite concerns expressed in Beijing in recent months over the safety of dollar-linked assets.

  China’s holding of US Treasury securities jumped to US$767.9 billion in March from US$744.2 billion the previous month, US Treasury data showed.

  The figure does not include those of Hong Kong, which climbed to US$78.9 billion from US$76.3 billion.

  The statistics showed China sitting comfortably as the top purchaser of US Treasury bonds despite years trying to diversify its reserves from the US dollar.

  Chinese Premier Wen Jiabao (溫家寶) had expressed rare official concern in March over the safety of Beijing’s huge US bond holdings but in the same month, according to monthly US Treasury data, Beijing scooped up US$23.7 billion of US Treasuries, the largest inflow since November.

  “This flies in the face of the ‘China is diversifying’ stories,” said Andrew Busch, analyst at BMO Capital Markets, commenting on the fresh US Treasury data.

  Wen’s concerns came amid frustration in Beijing that the nearly US$800 billion huge US stimulus measures to prop up the world’s largest economy could drive down the value of dollar-based assets.

  In addition, China was concerned that a US Federal Reserve move to buy up to US$300 billion in long-term US Treasury bonds to ease credit flows could dampen returns on its future bond purchases.

  “As much as China is whining about the impact of quantitative easing on the US dollar, their purchases of dollar-denominated assets was the strongest since November,” said Kathy Lien, director of currency research at Global Forex Trading.

  Being the top holder of US Treasury bonds, China is automatically the largest creditor to the US.

  It is also the world’s biggest holder of dollar reserves, at nearly US$2trillion — roughly double that of Japan and four times more than either Russia or Saudi Arabia.

  “Note that in [the] first quarter of 2009, China’s holdings of US Treasuries have increased by US$40 billion, whereas its foreign exchange reserves have increased by only US$7 billion, indicating a continued preference for US Treasuries,” Barclays Capital analyst Chirag Mirani said.

  Some analysts see the cozy relationship between China’s reliance on US bonds as a relatively safe investment and Washington’s dependence on Chinese financing to bankroll its economy as a potential nightmare.

  They worry that this could delay steps to ease the so-called global imbalances driven mainly by the US’ sinking current account deficit and China’s soaring surplus, and which they say are among causes of the current global financial turmoil.

  “Never before has a country as poor as China provided so much financing to a country as rich as the United States, and never before has a country that values its independence as highly as the United States relied so heavily on a single country’s government for financing,” said a report by the Council on Foreign Relations, a US think tank.

  “The longer the United States relies on Chinese financing to avoid necessary adjustment — one where it pays for its imports with exports rather than debt — the harder the transition is likely to be,” said the council’s experts Brad Setser and Arpana Pandey.

  “Creating a more financially balanced global economy will also be difficult so long as China’s government continues to peg tightly to the dollar and add large sums to its foreign assets,” they said.

  Some US groups charge that China is deliberately keeping its currency weak against the dollar to keep its exports competitive and make huge trade gains.
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