China Slows Purchases of U.S. and Other Bonds
Reversing its role as the world’s fastest-growing buyer of United States Treasuries and other foreign bonds, the Chinese government actually sold bonds heavily in January and February before resuming purchases in March, according to data released during the weekend by China’s central bank.
China’s foreign reserves grew in the first quarter of this year at the slowest pace in nearly eight years, edging up $7.7 billion, compared with a record increase of $153.9 billion in the same quarter last year.
China has lent vast sums to the United States — roughly two-thirds of the central bank’s $1.95 trillion in foreign reserves are believed to be in American securities. But the Chinese government now finances a dwindling percentage of new American mortgages and government borrowing.
In the last two months, Premier Wen Jiabao and other Chinese officials have expressed growing nervousness about their country’s huge exposure to America’s financial well-being.
Chinese reserves fell a record $32.6 billion in January and $1.4 billion more in February before rising $41.7 billion in March, according to figures released by the People’s Bank over the weekend. A resumption of growth in China’s reserves in March suggests, however, that confidence in that country may be reviving, and capital flight could be slowing.
The main effect of slower bond purchases may be a weakening of Beijing’s influence in Washington as the Treasury becomes less reliant on purchases by the Chinese central bank.
Asked about the balance of financial power between China and the United States, one of the Chinese government’s top monetary economists, Yu Yongding, replied that “I think it’s mainly in favor of the United States.”
He cited a saying attributed to John Maynard Keynes: “If you owe your bank manager a thousand pounds, you are at his mercy. If you owe him a million pounds, he is at your mercy.”
Private investors from around the world, including the United States, have been buying more American bonds in search of a refuge from global financial troubles. This has made the Chinese government’s cash less necessary and kept interest rates low in the United States over the winter despite the Chinese pullback.
There have also been some signs that Americans may consume less and save more money in response to hard economic times. This would further decrease the American dependence on Chinese savings.
Mr. Wen voiced concern on March 13 about China’s dependence on the United States: “We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.”
The main worry of Chinese officials has been that American efforts to fight the current economic downturn will result in inflation and erode the value of American bonds, Chinese economists said in interviews in Beijing on Thursday and Friday.
“They are quite nervous about the purchasing power of fixed-income assets,” said Yu Qiao, an economics professor at Tsinghua University.
Economists said there was no sign that the Chinese government had deliberately throttled back its purchases of overseas bonds to punish the United States for pursuing monetary and fiscal policies aimed at stimulating the American economy.
While those policies may run a long-term risk of setting off inflation, they also may benefit China if they rekindle economic growth in the United States and thereby revive China’s faltering exports.
The abrupt slowdown in China’s accumulation of foreign reserves instead seems to suggest that investors were sending large sums of money out of mainland China early this year in response to worries about the country’s economic future and possibly its social stability in the face of rising unemployment.
Evidence of such capital flight included a flood of cash into the Hong Kong dollar. Mainland tourists were even buying gold and diamonds during Chinese new year holidays here in late January.
China’s reserves have soared in recent years as the People’s Bank bought dollars on a huge scale to prevent China’s currency from appreciating as money poured into the country from trade surpluses and heavy foreign investment. But China’s trade surpluses have narrowed slightly as exports have fallen, while foreign investment has slowed as multinationals have conserved their cash.
Jun Ma, a Deutsche Bank economist in Hong Kong, predicted that China’s foreign reserves would rise only $100 billion this year after climbing $417.8 billion last year.
Some economists contend that slower growth in Chinese foreign currency reserves is not important to the economic health of the United States, even though it may be politically important. In the first quarter, instead of the Chinese government sending money out of the country to buy foreign bonds, Chinese individuals and companies were buying many of the same bonds.
“The outflow would mostly end up in the U.S. anyway,” even if China is no longer controlling the destination of the money, said Michael Pettis, a finance professor at Peking University, in an interview on Thursday.
Heavy purchases of Hong Kong dollars by mainland Chinese residents early this year also have the indirect effect of helping the United States borrow money. The Hong Kong government pegs its currency to the American dollar, and stepped up its purchases of Treasury bonds this winter in response to strong demand for Hong Kong dollars.
But China’s economy appears to be bouncing back from the global economic downturn faster than its trade partners’ economies. If that proves true, the result could be an increase in imports to China while its exports recover less briskly. This would limit trade surpluses and leave the People’s Bank with less money to plow into foreign reserves.