China Patiently Holds US Bonds

From market, page 17, issue no. 389 October 13 2008
Translated by Ren Yujie
Original article: [Chinese]
 
As the US financial crisis swept global markets, China's massive store of US-denominated foreign exchange reserves have become a focal point. Market observers wonder whether China's estimated 1.38 trillion dollars worth of such assets are safe, and how China would manage its role as the principal creditor nation of the United States.

By many accounts, it seems China will stand behind such assets and work to help stabilize global markets, even if that means buying more bonds.

An official from the People's Bank of China, the country's central bank, told the EO that any moves by China would be in line with stabilizing the international market and maintaining domestic economic growth. He added: "If China does not offload US bonds, if these assets are safe, then the influence of the sub-prime crisis on China's foreign reserves will be weak."

Unlike most countries, which have dumped US bonds since the sub-prime mortgage crisis started in August 2007, China has acted against the market and been snatching them up.

Figures from the US Treasury website showed that from January to July of 2008, China bought US Treasury bonds worth almost USD166 billion and sold bonds worth USD107.9 billion. At the same time, China bought USD117 and sold USD74.3 billion in Government Agency Bonds.

One source told the EO that it was a choice born of helplessness. "What can we buy if not US Treasury Bonds?", they added, noting that besides those assets, non-US dollar assets such as in Australian dollars, the euro and yen, make up 25% of the foreign reserves and include bonds for international financial organizations such as the World Bank, the Asian Development Bank, and the International Monetary Fund.

The same source said they were especially worried about the rapid growth of China's foreign reserves due to the huge China-U.S. trade volume and China's trade surplus. A high level of foreign exchange reserves led to a bloated money supply and growing domestic inflationary pressure, they added, saying that to reduce losses caused by devaluation, China had no choice but to spend large amounts of foreign reserves on US Treasury Bonds.

Industry insiders pointed out that US Treasury Bonds would sink as the US dollar tumbles, and that China's foreign reserves had suffered invisible losses since the acceleration of US dollar weakness in 2000.

Meanwhile, some analysts said that there were estimations that China would lose USD15 billion on Fannie Mae and Freddie Mac bonds.

The Wall Street Journal claimed that the success of the USD850 billion bailout plan would depend on China and the Middle East. As the  major oil-producing countries were not interested in low-interest US bonds, only China could help by buying the new debt.

Wu Jinglian, an economist, said "It is difficult to reverse the present global economic situation in the short term, in fact China is unable to change it. But at least China should not be fooled into footing the bill."

An official from the Ministry of Finance told the EO that the use foreign reserves to buy US Treasury Bonds was still under discussion. But it was definite that China would not offload US bonds at present, lest the move aggravate the global financial situation.

After the Bush bailout was published, the People's Bank of China spokesperson immediately announced that China was willing to cooperate more tightly with the US and hoped that other countries could maintain global financial market stability.

The market believed that China would inject liquidity in to US when necessary. Shen Minggao, former chief economist at Citigroup said the result of the US rescue plan would probably be China buying up new bonds. In essence, China would be forced to foot the bill.

One source estimated to the EO that China would ultimately buy US bonds even though the People's Bank had refused to provide USD200 billion to participate in the US rescue plan.

Zuo Xiaolei, chief economist for China Galaxy Security, said China would be better off lending its spare funds to the US given that the US government was the guaranteer instead of blindly investing in overseas assets, especial in Wall Street financial assets.