China’s assets in the US at risk?

Oh the irony. China is worried about the safety of its assets in the US. The US has given some assurances.

How did it come to this?

This is a very well written article that provides some sobering facts and figures. It is always worth remembering that China has a bigger population than the US and the EU put together.

The conclusion from this article:

1. China’s currency will NOT be appreciating against the dollar. 2. China cannot sell its large dollar holdings for 2 reasons (a) there is nothing else to buy (2) selling would drive down the price and cause the problem it is currently trying to avoid.

It is almost as if the US and China have each other in some sort of death grip. One wrong move by either could kill them both. Who will blink first……

Wen puts US honor on the debt line [Asia Times]

HONG KONG – Chinese Premier Wen Jiabao, faced with growing concern that United States efforts to stem the financial crisis will hit the value of China’s vast holdings of US debt, used the world’s press on Friday to demand that the US honor its promises.

Wen told a press conference after the conclusion of a two-week meeting of the country’s legislators that he was “a little bit worried” about the safety of Chinese assets in the US, and called on the US “to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.” He also reiterated that other countries had no right to push China into appreciating its currency, the yuan.

Various efforts by the US to resolve the country’s financial crisis by selling ever more debt to pump money into the financial system are raising concern that this will drive up inflation and pull down the value of the US dollar, which would cut the value of debt held by China, the largest creditor of the US.

“We are very concerned about the economic developments in the US economy,” Wen said. “The US administration of President Barack Obama has taken a series of measures to counter the financial crisis. We look forward to the effectiveness of those measures.”

Wen called on the US government to ensure that the value of Chinese assets in the US is maintained amid the crisis.

“We have lent a huge amount of money to the United States and of course we’re concerned about the security of our assets and, to be honest, I am a little bit worried,” Wen said in Beijing after conclusion of the second session of the 11th National People’s Congress (NPC). “That’s why here I would like to urge the US to keep its commitment and promise to ensure the safety of Chinese assets.”

About US$1 trillion of China’s foreign exchange reserves, which increased 27% last year to $1.95 trillion, is invested in US government bonds and other securities. China held $696.2 billion in US government bonds as of December, up from $681.9 billion a month earlier, according to the US Treasury international capital flow report released on February 18.

China has accelerated its purchases of Treasury debt since August 2008, when holdings grew by $23.7 billion month-on-month to US$541.4 billion. By September, it had holdings of Treasury debt worth $585 billion, more than Japan, previously the top holder of US Treasuries. In August 2008, Japan cut its holdings to $573 billion from $586 billion.

As the global financial crisis sends asset values plunging, mainland leaders are under growing pressure at home to diversify the country’s foreign exchange reserves.

In December at the fifth Sino-US Strategic Economic Dialogue in Beijing, Vice Premier Wang Qishan urged the US to adopt every measure necessary to stabilize its economy and ensure the safety of China’s assets and investments in the United States.

Pauline Loong, senior vice president in charge of China policy and risk research at CIMB-GK Securities (HK) Ltd, said she did not think China would dump its dollar holdings .

“I cannot see Beijing dumping its dollar holdings,” she said. “If the market thought there was anything to the talk, there would be a scramble to dump. The result would be exactly what Beijing would not want to see: a massive fall in the value of its dollar holdings. Also, Beijing has few alternatives. What is it going to switch into? There are few markets that are as deep and liquid as the dollar – and to park $2 trillion in exchange reserves, you can’t be dabbling about.

“The fact that Premier Wen talks about being worried about the value of the country’s dollar holdings is a good sign. If he is going to dump the dollar, he is not going to talk about it,” she said.

Even so, a two-day gain in Treasuries juddered to a hold on Friday, with the yield on the benchmark 10-year note rising six basis points to 2.91% as the price of the 2.75% security due in February 2019 fell $4.69 per $1,000 face amount, to 98 19/32 in early London trade, according to Bloomberg.

Wen reiterated China’s principle of guaranteeing the “safety, liquidity and good value” of its foreign exchange reserves and diversifying the investment of the reserves.

“On the foreign reserves issue, the first consideration is our national interest … But we also have to consider the stability of the overall international financial system, as the two factors are interlinked,” Wen said. “Currently, our reserves are generally safe.”

Wen also ruled out any further strengthening of the Chinese currency in the intermediate future. He said no country had the right to press for either the devaluation or appreciation of the yuan. A stronger yuan would drive up the price of exports to the US while making it cheaper for US goods to be imported to China.

The yuan “has appreciated since the European and Asian currencies have dropped in recent year, in addition to the yuan’s 21% appreciation against the dollar since July 2007”, he said.

Loong, however, said there was a risk of incorrectly interpreting such comments as indicating policy was set in stone.

Governments everywhere, “not just in China, are devising strategies and coming up with policies on the run. If economic data in the coming months surprise on the upside or downside, then Beijing will need to revise policy,” she said.

China, whose currency is not at present fully convertible into other currencies, is moving to make it more fully used in international trade. Wen said that a plan for the settlement of trade in yuan had been formulated and would be carried out as quickly as possible once it was approved by the State Council, or cabinet.

A pilot project involving yuan-denominated settlement of trade deals would start from Hong Kong, Guo Qingping, assistant governor of the People’s Bank of China, or the central bank, said on Wednesday in Beijing.

Referring to China’s ability to survive in the global downturn, Wen said the country was fully prepared for even worse conditions and had long-term preparations “with plenty of ammunition” to cope.

“We are ready to roll out new stimulus policies at any time,” Wen said, without giving details. China last November announced a 4 trillion yuan (US$585 billion) stimulus package to help boost the domestic economy as exports slumped.

Loong said the Chinese government would do whatever it took to support economic growth, but timing remained a question.

“The 4 trillion yuan fiscal spending needs time to kick in and work its way through to the economy. Beijing, we believe, will not fire until it can see the white of the enemy’s eyes. Why waste bullets?” she said.

“Any announcement of new stimulus money in the coming weeks as the market awaits news of the first quarter of 2009 gross domestic product [GDP] numbers is both good and bad news – good because it gives the government breathing space to tackle the basic problems of the economy; bad because the government clearly sees a need to prevent a seriously hard landing,” Loong said.

Details of the package, including how much is actually new spending, are not yet clear. Wen conceded that some projects in the stimulus package, such as roads and railways, were included in the country’s 11th five-year plan. Global stock markets declined sharply at the start of the NPC meeting when Wen, contrary to expectations, declined to announce any new stimulus funding.

China’s stimulus package plan was not fully understood by the world, he said. “Rumors and misunderstanding set the world stock market on a roller coaster ride,” he said.

Wen emphasized that although China would have difficulty in achieving its goal of 8% economic growth this year, it would be possible with “considerable efforts”, given the advantages of a huge domestic market, a large amount of labor and a sound and stable financial sector.

“With a 1.3 billion population … China has a bigger market than those of the Europe and the United States,” Wen said.

Even so, confidence is what China needs most to carry out its all-around economic stimulus package, he said.

“We have proposed a stimulus package only less than half a year after the financial crisis began. To implement the plan, I still believe confidence is still the first and foremost thing,” Wen said.

Originally published at China Economics Blog and reproduced here with the author’s permission

4 Responses to "China’s assets in the US at risk?"

  1. Guest   March 14, 2009 at 12:18 pm

    “The fact that Premier Wen talks about being worried about the value of the country’s dollar holdings is a good sign. If he is going to dump the dollar, he is not going to talk about it,” she said.This is a mistake. The comment is a shot across the bow. There is dumping and dumping. You won’t see the underground moves now being made, for a long time–their consequences will not be immediately clear.What he is saying is: Obama, you have to tell suburbia the truth–that they won’t have those jobs and houses for long.Will Obama do this? No. Assuming it still IS Obama (I think he will be indicted in the Rezko thing by Fitzgerald–Rezko has been talking to the prosecutor EVERY DAY for going on six months now), he will not break the bad news to suburbia. He will simply wait until suburbia collapses.And so the comment doesn’t mean the Chinese won’t get rid of the debt, it means they have already done so. In fact, they did so some time ago.It’s over for America–that’s what the message is. America is the land of the walking dead.John Ryskamp

  2. NFrazier   March 14, 2009 at 2:51 pm

    China’s anticipation of the effectiveness of Obama’s policies, in the face of a warning regarding fiscal prudence, suggests that the real message is: “Clean-up your banking system and don’t turn into Japan.”Otherwise, should Obama’s policies fail and the US reach the brink of a fiscal trap, China might sell its assets as quickly as possible. The resulting spike in interest rates and acceleration of mortgage defaults, bank failures, and fiscal insolvency might then allow China to buy US banks, real property, Detroit auto industry assets (possibly for export…), etc at fire sale prices. The long term value of China’s holdings in the US could actually increase as a result of this crisis. The word “nationalization” turns out to have more than one meaning.

  3. Guest   March 15, 2009 at 7:01 am

    China overplayed its hand-its merely blowing some hot polluted air up our skirts.

  4. bigD   March 20, 2009 at 4:40 am

    “It is almost as if the US and China have each other in some sort of death grip. One wrong move by either could kill them both. Who will blink first……”I guess the US of A blinked just two days ago.