WCA May 2009

Statue of Liberty Image from BigStockPhoto.com Photographer: Marty

Individuals are not the only Chinese stepping up their overseas investments. The official Xinhua News Agency said 25 th 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 6 th 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 21 st 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.”

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,” 3 rd 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.

Amen – in all the languages of both countries.

Dorothy Fabian – Features Editor

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Wire & Cable ASIA – May/June 2009