WCA May 2009

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Wire & Cable ASIA – May/June 2009 28
China and the US
A shift in Chinese spending habits
highlights the significance of China’s
portfolio in US government securities
Keith Bradsher, who is Hong Kong bureau chief of the
New York Times, has identified a trend that has important
implications for Americans: the movement of Chinese
money in a new direction – out of China. He observed,
“Some Chinese are so eager to turn their yuan into other
assets that, when an online real estate brokerage organized
a tour of foreclosure auctions in the United States, it
received so many applications that it had to turn away
nearly 400 people.” (“In a Tidal Shift, Chinese Spending
More Overseas,” 3rd February)
In Shanghai, Mr Bradsher noted, Chinese companies are
buying high-yield bonds issued by distressed American
companies at a time when most investors are standing well
clear of the bond market. And Chinese companies overseas
are sending home less of the money they earn from exports.
Presumably they, too, are keeping a weather eye out for
good deals in America.
China is big. And China is cash-rich. Therefore whatever
animates the Chinese – even ordinary bargain-hunting – is
important. But, at the same time that Chinese citizens are
starting to send more money overseas, foreign investors
are also pulling money out of China; and slowing the pace
of new investment, as well. Taken together, these trends
represent for Mr Bradsher “a potentially tectonic shift.”
The placement by Chinese individuals and companies
of more of their money outside China would be bound to
restrict China in its bankrolling of American trade and
budget deficits – but not only that.
Beijing has at least two-thirds of its vast foreign exchange
reserves invested in American securities, particularly the US
Treasuries to which it has shown considerable loyalty over
the years. With less income at its disposal, China would not
be able to continue buying quantities of Treasuries, whose
proceeds go toward funding US government programmes.
According to Mr Bradsher, analysts perceived “official
ambivalence” in comments by Prime Minister Wen Jiabao
on China’s intentions as to US Treasuries. What is certain
is that both Mr Wen and US President Barack Obama have
the keenest interest in the money leaving China. They will
be trying to decide whether the trend will last; if it does,
for how long; and what it might mean for the increasingly
symbiotic relationship of their two countries.
Of course, curtailment of the money flow into China ❖ ❖
could derive in some measure from Beijing’s decision
to halt the rise of the yuan against the US dollar in July
2008, and even to allow a brief decline against the dollar
in late November. Mr Bradsher noted that this removed
the incentive for investors to put money into China
in pursuit of currency gains. It also gave the US what
it wanted: a freer-floating yuan. Like many answered
prayers, this may have had unintended consequences.
Individuals are not the only Chinese stepping up their
overseas investments. The official Xinhua News Agency said
25th February that China’s government pension fund plans to
increase its holdings abroad this year. The National Council
of the Social Security Fund, created in 2000 to manage
reserves for China’s government welfare and pension
systems, will “steadily increase” foreign investments from
the current 6% of its $82 billion in assets.
China was the final leg of Mrs Clinton’s first overseas trip
in her new job, which included stops in Japan, Indonesia,
and South Korea. Indira A R Lakshmanan, reporting from
Beijing for Bloomberg News, noted the circumstances
which enabled Mr Obama’s chief diplomat to be blunt –
even forceful – in her advocacy for China’s continued fealty
to Treasuries.
The US is the single largest buyer of the exports that drive
growth in China, the world’s third-largest economy. China in
turn has invested its surplus earnings from exports primarily
in Treasuries. This has made it the world’s largest holder
of US government debt: $696.2 billion at the end of 2008,
during which year China boosted its purchases of US debt
by a whopping 46%.
Accordingly, Mrs Clinton felt able to make some bold but
plausible assumptions about the mind-set of China’s
leaders. They understand, she said, that “the United States
has to take some very drastic measures with the stimulus
package, which means we have to incur [more] debt.” The
Chinese are “making a very smart decision by continuing
to invest in Treasury bonds,” which she called a “safe
investment” because a speedy US recovery will fuel China’s
growth, as well.
Apparently, Beijing concurs. Shortly before her arrival in
Beijing, the Chinese government said it would keep on
buying Treasuries, with this caveat: future purchases will
depend on the preservation of their value and the safety of
the investment.
China’s currency reserves of $1.95 trillion represent ❖
❖
about 29% of the world total, and the disposition of that
much money must bulk at least as large in the thinking
of China’s leadership as it does in the White House.
Ms Lakshmanan called attention to an assessment by
the financial services firm JPMorgan Chase & Co that
bolsters Mrs Clinton’s case.
In a 6th February report, New York-based Chase
predicted that China will keep buying US Treasuries “not
only for the near-term stability of the global financial
system, but also because there is no viable and liquid
alternative market in which to invest China’s massive
and still growing reserves.”
“World events have given us a full and formidable ❖ ❖
agenda,” Mrs Clinton said 21st February at a Beijing
press conference with Foreign Minister Yang Jiechi
following a 90-minute meeting. “It is essential that the
United States and China have a positive cooperative
relationship.”
Amen – in all the languages of both countries.
Dorothy Fabian – Features Editor
Statue of Liberty Image from BigStockPhoto.com
Photographer: Marty