Why China may have slowed Treasury purchases
by Bruce Webb
There has been a scattering of stories about how China has slowed or stopped buying U.S. Treasuries. This story offers a possible explanation
LA Times: China’s investments in U.S. up sharply
Beijing is using its accumulation of billions of American dollars to step up its investments around the globe. In the last year, Chinese acquisitions in the U.S. have ranged from a relatively obscure theater in Branson, Mo., to stakes in such famous brands as Coca-Cola and Johnson & Johnson.
China’s huge stockpile of dollars stems in part from Americans’ enormous purchases of relatively inexpensive Chinese manufactured goods and the significantly smaller volume of U.S. exports to the Asian country.
By recycling much of its dollar trove over the years back to the United States with the purchase of U.S. government debt, China has in effect helped Washington finance its deficits.
Now, Beijing is branching out. The country’s direct investments overseas rose 6.5% in 2009 to $43.3 billion — despite a global slump in such investments — and could jump to $60 billion this year, Chinese state media reported last week.
Formal estimates of Chinese investments in the U.S. last year, excluding bond purchases, range from $3.9 billion — a figure put out by New York research firm Dealogic — to $6.4 billion, a number that comes from Derek Scissors, a Heritage Foundation research fellow who tracks China’s global transactions
I’ll let the econoBears explain the significance here, my flip summary would be “Why rent when you can own”. It certainly doesn’t indicate that the Chinese are expecting some terrific crash in the medium term.
Obviously this isn’t a complete explanation, even $6.4 billion would be a relatively small percentage of the typical China monthly Treasury purchase and this is an annual number, but it might still indicate that the Chinese are just doing some portfolio balancing and not fundamentally moving away from the U.S. overall.
Didn’t they recently put a couple of billion into Blackrock? I wonder how that’s doing?
hoiw much of the S&P 500 can you buy with 2.4 trillion reserves? and how much is being laundered through the UK?
25%
Setser says a lot. How he knows that is a mystery.
OK, not to get all textbook or anything, but if Chinese reserve managers stop buying Treasuries in order to buy other $ assets, then the former holders of those other $ assets are going to end up with cash and no assets, and will be buyers of Treasuries. Or something other than Treasuries, from somebody who will then have to buy Treasuries.
If China had shifted from $ assets to euro assets, there could be a substantial FX implication, and I don’t want to push this whole business of cash flowing like water from place to place to very far. Still, as long as China is aiming at the US with all that money, it should act as a limit on Treasury yields.
I agree with Bruce on this one. China has been saying that it will cut back on Treasury holdings, which, given the size of their holdings, is the OPPOSITE of what they would be doing if they were actually going to divest.
China funds the US deficit. Now all they need to do is buy some credit default swaps against us and they’ll have set up the perfect Goldman 1-2 punch.
China funds around 12% of new Debt Held by the Public, in the last 8 months a lot less than that. It is very likely that release of the Jan numbers for Major Foreign Holders of Treasuries will see Japan retaking it’s place as top US creditor from China. Less than a third of Chinese Foreign Currency reserves are in the form of US Treasuries plus another chunk in Agency debt, the widespread narrative that they have our financial mads in a vice grip has been much over-hyped by the Entitlement Crisis folk for their own ulterior purposes.
Bruce,
Exactly. Many entitlement crisis folks don’t care much for accuracy, truth, or problem solving.