China is right to have doubts about who will buy all America's debt

Discussion in 'China' started by LETHALFORCE, Nov 8, 2009.

  1. LETHALFORCE

    LETHALFORCE Moderator Moderator

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    China is right to have doubts about who will buy all America's debt - Telegraph

    China is right to have doubts about who will buy all America's debt

    Chinese doubts about the value of US Treasury bonds highlight a crucial question: who will buy the estimated $2.7 trillion (£1.9 trillion) to $4.2 trillion of debt expected to be issued over the next two years

    With annual foreign purchases accounting for less than a tenth of the low end of that range, and domestic investors unable to bridge the gap, the Chinese are right to worry.

    Yu Yongding, former adviser to the People’s Bank of China, recently demanded guarantees for the value of China’s $682bn of Treasury securities. Then Luo Ping, director of the China Banking Regulatory Commission, said that China had misgivings about the US economy, but despite this it would continue to buy Treasuries. The two statements appear designed to raise the issue non-confrontationally before new chief US diplomat Hillary Clinton’s visit to Beijing on February 20.

    China worries about the dollar’s value against other currencies, particularly the yuan. With US interest rates so low, the dollar’s value may slide. However, President Barack Obama has repeatedly said he wants a strong dollar, and indeed its trade-weighted value rose 13.9pc between April and December 2008.

    The other area of concern for China is the value of its Treasuries. Given the US borrowing requirement and its lax monetary policy, Treasury bond yields could well rise sharply, causing a corresponding price decline. If China’s holdings match Treasuries’ average 48-month duration, then a 5pc rise in yields, from 1.72pc on the 5-year note to 6.72pc, would lose China 17.5pc of its holdings’ value, or $119bn.

    Foreign buyers have absorbed a little over $200bn of Treasuries annually, a useful contribution to financing the $459bn 2008 deficit, but only a modest help towards the $1.35 trillion minimum average deficit forecast for 2009 and 2010.

    Unless that changes substantially, there will be $1trillion annually to be raised by the Treasury from domestic sources, more than double the previous record from domestic and foreign sources together, plus whatever is needed to bail out the banks.

    Even if the US savings rate were to rise from zero to its long-term average of 8pc of disposable personal income, that would create only an additional $830bn of savings -- not enough to fund the domestic share of the deficit. Interest rates would probably have to rise substantially to pull in more foreign investors.

    Yu is right to worry.
     
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  3. mattster

    mattster Respected Member Senior Member

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    China bought US bonds so that the US consumer could get easy access to credit which fuels spending. China needed the US consumer to spend and buy their products. So china has no choice in the matter as long as their economy is export driven.
     
  4. Armand2REP

    Armand2REP CHINI EXPERT Veteran Member

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    American financial institutions buy more debt than anyone else. Americans own over 70% of it. I assume they will continue to buy it.
     

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