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China Grows More Picky About Debt
HONG KONG — Leaders in both Washington and Beijing have been fretting
openly
about the mutual dependence — some would say codependence —
created by China’s vast holdings of United
States bonds. But beyond
the talk, the relationship is already changing with surprising speed.
China is growing
more picky about which American debt it is willing to
finance, and is changing laws to make it easier for Chinese companies
to
invest abroad the billions of dollars they take in each year by
exporting to America. For its part, the United States is
becoming
relatively less dependent on Chinese financing.
China has actually bought Treasury bonds at an accelerating
pace over
the last year — notwithstanding Chinese officials’ complaints about
American profligacy. But the
borrowing needs of the United States
government have grown even faster. So China represents a rapidly
shrinking share
of overall purchases of Treasury securities. “China’s
demand for Treasuries has increased over the past year,
but it hasn’t
increased at anything like the pace of the Treasury’s sale of new
Treasury bonds,” said
Brad W. Setser, a specialist in Chinese
financial flows at the Council on Foreign Relations.
Americans and investors
elsewhere are buying Treasuries instead. They
are saving more and have been shifting out of other investments —
including
equities until the past two months — and into Treasuries.
China bought less than a sixth of the Treasuries issued
in the 12
months through March. Less than two years ago, by contrast, Chinese
purchases of Treasuries, which included
purchases in the secondary
market as well as newly issued securities, briefly exceeded the entire
borrowing needs of
the United States.
Financial statistics released by both countries in recent days show
that China paradoxically
stepped up its lending to the American
government over the winter even as it virtually stopped putting fresh
money into
dollars.
This combination is possible because China has been exchanging one
dollar-denominated asset for another
— selling the debt of
government-sponsored enterprises like Fannie Mae and Freddie Mac in a
hurry to buy Treasuries.
While this has been clear for months, new
data shows that China is also trading long-term Treasuries for
short-term
notes, highlighting Beijing’s concerns that inflation will
erode the dollar’s value in the long run as America
amasses record
debt.
So China’s rising purchases of Treasuries do not represent the
confident bet on America’s
future that they might seem to be on the
surface. For instance, China does not appear to be dumping euros or
yen to
buy Treasuries, economists said.
That said, recent Chinese and American data suggest that an astounding
82 percent
of China’s $2 trillion in foreign reserves is in dollars,
according to calculations by Standard Chartered.
The
development has caught the attention of the leaders of both countries.
“The long-term deficit and debt that we
have accumulated is
unsustainable — we can’t keep on just borrowing from China,” President
Obama said
last Thursday.
Wen Jiabao, prime minister of China, also has expressed concern.
“We have lent a huge amount
of money to the U.S. Of course we are
concerned about the safety of our assets. To be honest, I am
definitely a little
worried,” Mr. Wen said earlier this year.
China now earns more than $50 billion a year in interest from the
United
States, Mr. Setser at the Council on Foreign Relations
calculated.
China’s leaders were able to buy more Treasuries
in recent months
without buying more dollars because they have abruptly turned their
back on the market for securities
issued by government-sponsored
enterprises.
China was the world’s biggest buyer of these securities a year
ago,
splashing out more than $10 billion a month.
But in the 12 months through March, it actually had net sales
of $7
billion, and ramped up purchases of Treasuries instead.
China has also changed which Treasuries it buys. It
has done so in
ways calculated to reduce its exposure to inflation or other problems
in the United States. As recently
as a year ago, China actively bought
long-dated bonds, seeking the extra yield they could bring compared to
Treasury
securities with short maturities, of which China bought
virtually none.
But in each month since November, China
has been buying more Treasury
bills, with a maturity of a year or less, than Treasuries with longer
maturities. This
gives China the option of cashing out its positions
in a hurry, by not rolling over its investments into new Treasury
bills
as they come due should inflation in the United States start
rising and make Treasury securities less attractive.
The
big question now for policy makers and economists alike lies in
whether the Chinese government’s purchases of American
securities will
rise or fall in the coming months.
Two big forces are at work — but they are pushing Chinese
investments
in opposite directions and might cancel each other out.
The first big shift is that Chinese foreign
exchange reserves might
start growing again, after shrinking early this year.
A senior Chinese economic policy maker,
Xu Lin, expressed concern here
on Monday that the reserves might grow faster if speculators started
pushing more foreign
exchange into China in the months ahead.
China is strongly opposed to any significant appreciation or
depreciation
of its currency, Mr. Xu said at a press conference. But
if international investors conclude that the Chinese economy has
stabilized
ahead of economies elsewhere, they may start pumping more
money into the Chinese economy, he said.
To keep its currency
at the same level, the Chinese government buys
foreign currency flowing into the country in excess of China’s needs.
If
overseas demand for Chinese exports recovers, then China’s trade
surplus could start widening again as well. This
would also tend to
fatten Chinese reserves.
But the countervailing trend is that the Chinese government is trying
to
foster channels for foreign currency to be pumped out of the
country without the involvement of the central bank. The government
has
been buying a wider range of assets and encouraging the private
sector to invest more money overseas.
“That’s
part of a strategic move by the authorities to diversify,”
said Wensheng Peng, the head of China research at Barclays
Capital.
“The reserves growth should accelerate because of inflows, but it will
not be as large as what we observed
in 2007 and the first half of
2008.”
The State Administration of Foreign Exchange, which is part of the
central
bank, issued draft regulations on Monday that would make it
considerably easier for private companies to raise dollars
in China to
spend on overseas investments — a step that would lessen the need for
the Chinese government to buy
up those dollars.
This spring China has also been stepping up its purchases of
commodities, which are usually bought
in dollars. Iron ore has been
piling up on Chinese docks, government stockpiles of crude oil and
grain are being expanded
and stockpiles are being started for products
like gasoline, diesel and sugar.
After six years of silence, China
unexpectedly disclosed last month
that it had been gradually buying gold from domestic producers. The
country’s
reserves had climbed from 600 tons in 2003 to 1,054 tons,
worth $31.8 billion at prices late Wednesday.
The disclosure,
which produced a frisson of excitement in gold
markets, may have been aimed at reassuring a domestic audience that
the
Chinese government was not putting all the nation’s savings into
American dollars. But the actual investment was
tiny compared with
China’s foreign exchange reserves — and showed that China was
accumulating gold at a
much slower rate than foreign currency.
A person in periodic contact with China’s central bank, who insisted
on
anonymity to preserve his access, said that a Chinese central
banker complained to him last year that “we have so
much money and
there’s so little gold, we can’t buy much without driving up the
price.”
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