China’s Investment Alternatives: Why China Can’t Sell U.S. Treasuries
by David Fessler, Advisory Panelist
As if we needed something else to concern ourselves with, the Is-China-Going-To-Start-Selling-Treasuries worry mill is cranking up… again. It seems every once in awhile - and more so lately - the financial pundits begin to climb the China wall of worry.
And it’s not an unreasonable question: Last year, China became the biggest foreign holder of U.S. securities, when it plunked down almost $66 billion for them in October alone.
With that big of a stick, some believe that China could bring down the U.S. without ever setting foot here.
Others feel it already is, by artificially setting the rate at which its currency is tied to the dollar. Still others feel that we are worrying needlessly, and we have nothing to worry about, as China has few other investment alternatives.
Will China continue to buy Treasuries? What will happen when it stops and starts buying something else? Or worse - what if it starts dumping U.S. debt?
The answers to these questions may surprise you. But first, let’s see if we can get our hands around the size of China’s problem.
The World’s Biggest Cash Pile
Make no mistake: it’s a much bigger problem for China than it is for us.
When you’re sitting on the biggest mountain of surplus cash in the world, what do you do with it? This is the roughly $2 trillion dollar question that Chinese central bank officials have to wrestle with.
And the problem just keeps getting bigger. For the first three quarters of 2008, China’s foreign exchange reserves increased by a whopping $377 billion. That’s $10 billion more than the same period in 2007.
Why does it continue to buy them? The simple reason is that is has to, because of its exchange rate policy. In order to keep the value of the Chinese yuan from appreciating versus the dollar, China’s central bank must buy U.S. dollars in massive quantities. And rather than just sitting on the physical currency - which pays zero interest - it buys foreign securities.
What percentage of China’s foreign reserves is held in U.S. Treasuries?
No one knows for sure, but analysts generally believe the figure could be as high as 70%. That would put China’s U.S.
