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China Not About to Dump American Bonds
Posted By Derek Scissors, Ph.D. On February 13, 2009 @ 10:51 am In International | Comments Disabled
The Financial Times  makes a valiant effort to curb wild talk about China dumping U.S. Treasury bonds. Luo Ping of the China Bank Regulatory Commission may use strong language – “we hate you guys ” — but he has a better grip on the PRC’s options than much of the American press or, for that matter, Chinese Premier Wen Jiabao .
Luo makes explicit that the size of China’s trade surplus with the U.S. and the balance of payments system Beijing has staunchly defended leave it no choice but to buy treasuries. There is no choice now  just as there was no choice before the financial crisis.
A change in the Chinese system would require either more currency flexibility or otherwise freer flow of domestic and foreign money across China’s borders, both major American goals. Related, if China’s trade surplus with the U.S. shrinks sharply for any reason, they would have fewer dollars to cycle back into treasuries. But a smaller trade deficit with China would also bring some benefits.
The real danger is Chinese bond purchases will become inadequate. The PRC continues to buy the same quantity, but Treasury sells so many more bonds that it outstrips China’s demand, and everyone else’s. Interest rates then rise. That problem can only be fixed by curbing the federal deficit.
If treasuries don’t raise enough questions, there’s more to consider. Luo demurred about Chinese interest in financial acquisitions. But a headline in the same edition of the FT  shows the dominant Chinese aluminum producer is looking to go forward with the PRC’s biggest ever overseas investment. The acquisition is being driven by the global need for cash right now, a need certainly present in the U.S. There may be little to discuss with respect to treasuries but a $20 billion Chinese offer for shares in a major American company  would have potent implications both commercially and politically.
Article printed from The Foundry: Conservative Policy News Blog from The Heritage Foundation: http://blog.heritage.org
URL to article: http://blog.heritage.org/2009/02/13/china-not-about-to-dump-american-bonds/
URLs in this post:
 Financial Times: http://www.ft.com/cms/s/0/ba857be6-f88f-11dd-aae8-000077b07658.html
 we hate you guys: http://www.nytimes.com/2009/01/08/business/worldbusiness/08yuan.html
 Chinese Premier Wen Jiabao: http://www.reuters.com/article/newsOne/idUSTRE50U1RJ20090131
 no choice now: http://blog.heritage.org http://www.heritage.org/Research/AsiaandthePacific/wm2249.cfm
 FT: http://www.ft.com/cms/s/0/e476a274-f8a6-11dd-aae8-000077b07658.html
 $20 billion Chinese offer for shares in a major American company: http://www.heritage.org/Research/AsiaandthePacific/bg2237.cfm
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