China Ink

Show me the money

Premier Wen Jiabao is “a little bit worried” about China’s dollar-denominated investments

Which assets is he most worried about?

The Chinese press focus mostly on US Treasuries, with the state media reporting that its government has bought “low-risk but low-yield assets, such as US government bonds, to play it safe.”

Chen Zhiwu, a professor at Peking University writing in the Southern People Weekly Magazine last month, argued that treasuries had “appreciated a lot”, and looked especially strong compared to alternative returns in commodities. Zhang Bin in the Oriental Morning Post also emphasised the “high security” of the investment strategy being pursued, and thought that Beijing is not too pressed by “short term fluctuations”.

Brad Setser at the Council of Foreign Relations agrees that China has its largest single investment (about $900 billion) in US Treasuries. But he says that most of the rest is in riskier asset classes, with $600 billion in agency bonds (like Fannie Mae and Freddie Mac) and $190 billion more in corporate bonds and equities. Much of this investment was made last year (so mark-to-market losses have been substantial) and lacks the implicit “back-stop” sovereign guarantee. This is what has so alarmed the Chinese leadership, prompting Wen to speak out on a need for US guarantees.

How about the bigger picture?

Xinhua celebrates China’s contribution to the global economy, noting that “coordinated efforts”, like the ongoing $586 billion domestic stimulus package, will help return the world economy to more normal health, “as well as bring China into a new era of opening-up and development.”

Schadenfreude looms at the New York Times, whose bigger picture analysis concentrates more on China’s essential economic conundrum; should it think like an exporter or a creditor? More US stimulus spend might bolster demand for Chinese goods but it could also stoke up inflation and diminish the value of its dollar holdings.

Is China in the stronger position?

Most of the mainland press stresses the US has obligations to its Chinese creditors. But how much leverage does China really have? Last month’s frank admission from Luo Ping, a director-general at the China Banking Regulatory Commission (“We know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do”) was not widely reported in the domestic press.

In fact, of 70 economists surveyed by China Business News only a quarter supported further purchase of US government bonds. According to China Daily, the country’s holdings of US Treasuries rose by only $12.2 billion in January, the smallest increase since June. “The allure of US Treasuries is set to fade,” it reports.

The speediness of the Obama administration’s response to Wen’s concerns suggest that it is keen to keep China onside, however, not least with another $1.7 trillion in debt issuance on the cards this year to support further stimulus spending of its own.

Peter Hartcher at the Sydney Morning Herald says Washington will have to make more concessions, including supporting China’s call for voting power at the IMF. But, overall, the two countries interests are too intertwined for winners and losers to be identified. They are both locked into the financial version of the “mutually assured destruction” that characterised the nuclear stand-off of the Cold War.


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