China Re-Committing to Treasuries: Owning the Bank

Dave Schuler · Monday, March 23, 2009 · 1 comment

China has re-affirmed its commitment to continue buying U. S. Treasuries:

March 23 (Bloomberg) — China’s top foreign-exchange official said the nation will keep buying Treasuries and endorsed the dollar’s global role, supporting the U.S. as the Obama administration increases spending to revive growth.

Treasuries form “an important element of China’s investment strategy for its foreign-currency reserves,” Hu Xiaolian, director of the State Administration of Foreign Exchange, said at a briefing in Beijing today. “We will continue this practice.”

Hu’s remarks came as Treasuries extended the worst start to a year since 1996 and less than two weeks after Premier Wen Jiabao said he was “worried” about the safety of the securities. U.S. President Barack Obama is relying on China to keep buying Treasuries as his administration sells record amounts of debt to fund a $787 billion stimulus package.

“China’s so heavily invested in U.S. Treasuries that to stop buying now would have a negative impact that would see China’s investments fall in value,” said Dwyfor Evans, a strategist with State Street Global Markets in Hong Kong. “It’s pretty important for the U.S. that the main buyers keep making purchases.”

The reasons for China’s continuing to buy U. S. Treasuries are many. The initial strategy, cycling dollars obtained in trade back into Treasuries to keep unemployment down (and avoid buying U. S. goods), is still valid. China doesn’t have a sound banking system or equities system of its own for investment. And, of course, as mentioned in the last paragraph quoted above, when you owe $1,000 to the bank, the bank owns you but, apparently, when you owe $740 billion to the bank, you own the bank. The current value of U. S. Treasuries held by China amounts to too large a portion of China’s national wealth to allow their investment to collapse.

In preemptive reaction, although China has become our largest foreign creditor, the proportion of U. S. public debt held by the Chinese remains relatively small, in single digits. They have more to be worried about than we do by the amount of our public debt they own.