China’s U.S. Debt Holdings Aren’t Threat, Pentagon Says

Discussion in 'Americas' started by asianobserve, Sep 11, 2012.

  1. asianobserve

    asianobserve Elite Member Elite Member

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    by Tony Capaccio and Daniel Kruger - Sep 11, 2012 9:30
    Bloomberg


    China’s holdings of more than $1 trillion in U.S. debt and the prospect that it might “suddenly and significantly” withdraw funds don’t pose a national security threat, according to a first-ever Pentagon assessment.

    “China has few attractive options for investing the bulk of its large foreign exchange holdings out of U.S. Treasury securities,” given their extent, according to the report dated July 20 and obtained by Bloomberg News.

    China is the second-largest holder of U.S. government debt after the Federal Reserve. Acting at the direction of Congress, the Defense Department studied the rationale behind the investments and whether “the aggressive option of a large sell- off” would give China leverage in a political or military crisis. China’s debt holdings have been cited as a sign of U.S. vulnerability by Republicans in this year’s election campaign.

    “Does the America we want borrow a trillion dollars from China? No,” Mitt Romney said Aug. 30 in accepting the presidential nomination at the Republican convention in Tampa, Florida.

    China’s holdings of U.S. government securities were $1.164 trillion as of June, according to Treasury Department data released Aug. 15. China has increased its holdings this year, as the American economy stalled and Europe’s sovereign-debt crisis deepened.

    ‘Financial Weapon’

    Chinese commentators have occasionally suggested using the debt holdings to pressure the U.S. on its pro-Taiwan policies. A senior People’s Daily editor wrote in an August 2011 editorial that “now is the time for China to use its ‘financial weapon’ to teach the U.S. a lesson if it moves forward” with additional arms sales to the island democracy, according to the Pentagon report.

    “Attempting to use U.S. Treasury securities as a coercive tool would have limited effect and likely would do more harm to China than to the United States,” according to the report, which was sent to congressional committees by Defense Secretary Leon Panetta. “As the threat is not credible and the effect would be limited even if carried out, it does not offer China deterrence options” in a diplomatic, economic or military situation, the Pentagon found.

    The Pentagon’s conclusions were backed by analysts such as David Ader, head of U.S. government bond strategy at CRT Capital Group LLC in Stamford, Connecticut.

    The Chinese “are very astute money managers and they would recognize that the damage of doing that would have negative consequences for them and for global trade, which is already in a difficult place,” Ader said in an interview.

    ‘Side Issue’

    While the total size of the U.S. debt “and trend of the debt is a national security risk,” China’s holdings “are a side issue,” Derek Scissors, a China analyst for the Heritage Foundation in Washington, said in an e-mail.

    Still, “if deterrence breaks down and a conflict starts, China is going to attack the U.S. bond market and accept the ensuing financial losses,” he said.

    The Pentagon consulted with the Treasury and State departments and the Director of National Intelligence in compiling the report, said Pentagon spokeswoman Major Catherine Wilkinson.

    “Chinese officials often act as if they are doing the U.S. a big favor by buying U.S. debt, and sometimes officials suggest that this policy could be easily changed to punish the United States,” Wayne Morrison, an Asia trade specialist with the nonpartisan Congressional Research Service.

    “In fact, the Chinese are acting out of their own self- interest,” Morrison said in an e-mail. “They have to buy U.S. dollar assets as long as they are intervening in currency markets to hold down the value of the RMB against the dollar,” he said, referring to China’s currency, the renminbi.

    China Selling

    China decreased its Treasury holdings last year with little apparent impact in the market, Treasury data show. The world’s most populous country reduced its position in Treasuries in the first yearly decline since Bloomberg began tracking the data in 2001.

    The holdings declined 0.7 percent, or by $8.2 billion, to $1.15 trillion last year. The decline was much steeper in the second half of the year when China’s stake plunged 12 percent, or by $163 billion, from an all-time high of $1.31 trillion in July 2011, the data show.

    During that period, 10-year Treasuries rallied as the U.S. credit rating was reduced by Standard & Poor’s to AA+ from AAA and the European sovereign debt crisis worsened, pushing the yield to 1.88 percent from 2.80 percent.

    Foreign investors held 50.3 percent of the $10.52 trillion in outstanding Treasuries as of June, government data show. That’s down from April 2008, when they reached 55.7 percent of the $4.64 trillion in U.S. marketable debt.

    Shelby, Clinton

    Both Democrats and Republicans have raised concerns in the past about the risks of China and other countries holding a large proportion of U.S. Treasury debt.

    Senator Richard Shelby, an Alabama Republican, said in a February 2006 interview that China at some point may be able to influence U.S. economic policy because of its holdings. “What if they dumped their bonds all at once?” he said.

    When Democratic Senator Hillary Clinton of New York, who is now Secretary of State, was running for president in 2007, she wrote Treasury Secretary Henry Paulson and Fed Chairman Ben S. Bernanke to say the amount of U.S. debt held by investors abroad meant “we can too easily be held hostage to the economic decisions being made in Beijing, Shanghai and Tokyo.”

    Short-Term Disruptions

    A sudden and large reduction of China’s holdings “could cause short-term” secondary market disruptions and interest- rate increases for Treasury debt issues, according to the Pentagon report.

    It also “would impose significant costs on China,” as the supply of U.S. Treasuries increased and the value of China’s holdings fell sharply, the Pentagon found.

    Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers that trade directly with the Fed, said other buyers would step in if China eliminated or reduced its U.S. holdings.

    “In an environment like today, if Treasuries were to sell off 50 basis points in the 10-year sector, you’d see a lot of demand from domestic and non-traditional foreign investors, including other central banks, which would step in to purchase at lower prices and somewhat higher yields,” Jersey said. A basis point is 0.01 percentage point.

    The Pentagon said in its report that the Fed also is “fully capable of purchasing U.S. Treasuries dumped” by China and “reducing the economic impact.”

    A Chinese move to “suddenly and significantly” reduce its Treasury holdings “would fundamentally change the international finance and business community’s perception of China as a reliable and respected economic and financial partner,” the Pentagon said.



    China’s U.S. Debt Holdings Aren’t Threat, Pentagon Says - Bloomberg
     
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  3. sob

    sob Moderator Moderator

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    This article makes sense in a very fundamental way. If the Chinese were to dump their holdings in the US T Bills , where would they go with the money.

    Again if they start dumping the T Bills then the value will drop so sharply that they may recover only 60 to 70% of their investment, and then what. The US Dollar will fall and with that the Chinese advantage over the US currency will vanish, and in one stroke their export market is finished.

    Last year the Japanese ( after the Tsunami ) and the Chinese have reduced their holdings considerably and the US economy has proven quite resilient to absorb this outflows.

    With this background I do not see the Chinese ever carrying out this threat to dump US T Bills. This is just the fantasy of the online Chinese fan boys.
     
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  4. asianobserve

    asianobserve Elite Member Elite Member

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    This is the more important reason for their US Treasuries acquisitions:

    “In fact, the Chinese are acting out of their own self- interest,” Morrison said in an e-mail. “They have to buy U.S. dollar assets as long as they are intervening in currency markets to hold down the value of the RMB against the dollar,” he said, referring to China’s currency, the renminbi."

    The Chinese government has been artificially holding down the value of their currency against the dollar to maintain their export edge (expensive Yuan means more expensive Chinese products in the international market).

    UPDATE 1-China ups Treasury buys but foreign demand fades | Reuters
     
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  5. asianobserve

    asianobserve Elite Member Elite Member

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    However, in order to avoid this situation (which would decrease Chinese exports), the Chinese central bank chooses a different solution: it slows the appreciation of the Yuan, or in some cases effectively pegs the CNY against the USD. The central bank net buys USD, then sterilizes the excess dollar flows by buying dollar-denominated assets, such as U.S. treasuries. This has the effect of keeping the excess dollars out of the currency exchange markets, where they would cause a correction in the exchange rates. Thus, the Chinese central bank manipulates the exchange rates by creating yuan and buying U.S. debt. This "printing" of Chinese Yuan by the central bank is not without consequence, however, since in excess (if yuan are created faster than domestic economic output) it would eventually lead to inflation, causing consumer prices to rise.[8][9] Economist Paul Krugman writes that by keeping its currency artificially weak China generates a dollar surplus; this means that the Chinese government has to buy up the excess dollars.[10]

    Currency intervention - Wikipedia, the free encyclopedia
     
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  6. sob

    sob Moderator Moderator

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    This currency intervention and artificial propping up the RMB, is a very dangerous tight rope walk that the Chinese Government is doing. One tiny slip can be very dangerous.

    But what helps them is the sheer size of the economy and the banks which are under their tight control. They allow them a leeway which other countries will never be able to do.
     
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  7. asianobserve

    asianobserve Elite Member Elite Member

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    One of the advantages of being a quasi-communist and quasi-capitalist country...
     
  8. spikey360

    spikey360 Crusader Senior Member

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    This is a tricky one. China having holdings of US Debt is not a big threat simply because if they decide to use that to their advantage, that is the moment they lose that advantage. At worst, this can serve as endless fuel for rhetoric from the Chinese side, but they are not that unintelligent to sell them off and lose control over
    >Artificial RMB value.
    >Propaganda for billions at home.
    >Largest market for mostly bad Chinese products.
     
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  9. asianobserve

    asianobserve Elite Member Elite Member

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    Finally, something we both agree on... :thumb:
     
  10. no smoking

    no smoking Senior Member Senior Member

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    Well, this guy didn't get it right: these debt holdings are not a threat but a rope which combine 2 countries' economies together.
    With these holdings as guarantee, China can go out to buy resources with US dollar credit.
    With these holdings as guarantee, Wall street can feel safe continuing to invest hundreds of billions dollars in China.
    With these holdings as gurantee, China sucessfully make itself the major factory of US economic system.

    With these debts, in certain extent, on one hand, protecting China's economy becomes US gov's responsibility; on the other hand, China has to support US dollars dominant position in the world.
     
  11. LETHALFORCE

    LETHALFORCE Moderator Moderator

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    This is great since US debt is such a wonderful thing China should be take a few trillion
    more no problem for USA. You have USA's good faith backing this paper and nothing more
    since there is no market for it and don't worry about any silly US downgrades just keep
    buying more.
     
    Last edited: Sep 12, 2012
  12. average american

    average american Senior Member Senior Member

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    and protecting US econmy becomes Chinas responsibility if they want paid back, its kind of win win for both sides.
     
  13. LETHALFORCE

    LETHALFORCE Moderator Moderator

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    Just don't try to collect the debt and the relations will never go bad.
     
  14. Yusuf

    Yusuf GUARDIAN Administrator

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    The question to ask is if the US sees it as a strategic weapon and a threat against china rather than the Chinese losing any threat with the debt holdings.
     
  15. no smoking

    no smoking Senior Member Senior Member

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    The truth is Chinese never worried about US' ability paying back! And Chinese doesn't really expect these debt to be paid back--these debts already fall on those resources-exporting countries by the long-term resource supplying contracts which are calculated on US dollars!

    With all these debts, USA and China together kidnap the whole world:

    -USA robs the whole world resources by issuing these papers!
    -The whole world market and resource base were openned to the growing Chinese manufacturers.

    This is the real evil axe!
     
  16. LETHALFORCE

    LETHALFORCE Moderator Moderator

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    Does the world want Crappy Chinese products??
     
  17. no smoking

    no smoking Senior Member Senior Member

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    Well, thinking about this: China doesn't store these debts under its bed! On the contrary, China already spent them on those hugh amount energy contracts! If USA use this so called strategic weapon, the major damage would go to the rest of world instead of China. So the only result is USA will destroy its own US dollar dominant position in world economy.
     
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  18. asianobserve

    asianobserve Elite Member Elite Member

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    If the US is devalued, I think it is on borrowed valuation anyway, then the Yuan has no way to go but up. But Chinese leaders obviously do not see this as anything beneficial to China.
     
  19. ice berg

    ice berg Senior Member Senior Member

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    As an american, you should know.:rofl:

    Table 3: Top US Imports from China, 2011 ($ billion)
    *Calculated by USCBC
    Source: ITC
    HTS# Commodity description Volume % change over 2010
    85 Electrical machinery and equipment 98.7 8.7
    84 Power generation equipment 94.9 14.7
    95 Toys, games, and sports equipment 22.6 -9.4
    94 Furniture 20.5 2.7
    64 Footwear and parts thereof 16.7 5.1
    61 Apparel, knitted or crocheted 15.1 7.4
    62 Apparel, not knitted or crocheted 15.0 1.8
    39 Plastics and articles thereof 10.9 13.0
    73 Iron, steel 8.6 18.0
    87 Vehicles, excluding rail 8.1 17.0
     
    Last edited: Sep 13, 2012
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  20. s002wjh

    s002wjh Senior Member Senior Member

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    china continue to buy US t-bill because it has too keep $$ from sliding toward the bottom, also when exports to US, US pay for those product with $$$, and US doesn't have enough export to chian to make it balance. so both are stuck at the same place. china & US economy both want each other economy to be strong to protect their own. so china is not gonna sell the t-bill, cause doing so will hurt its own investimate, but they slowly use their surplus to secure energy/raw materials.
     
  21. LETHALFORCE

    LETHALFORCE Moderator Moderator

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    China is getting paid with debt not money. China gets 1% interest Chinese economy
    grows at 10% I wonder why China views T-bills as the better investment?
     
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