[DEBATE] : China said to need guarantees for Treasuries
Riaz K Tayob
riaz.tayob at gmail.com
Wed Feb 11 06:37:09 GMT 2009
China said to need guarantees for Treasuries
By Belinda Cao and Judy Chen
Wednesday, February 11, 2009
BEIJING -- China should seek guarantees that its $682 billion holdings
of U.S. government debt won't be eroded by "reckless policies," said Yu
Yongding, a former adviser to the central bank.
The U.S. "should make the Chinese feel confident that the value of the
assets at least will not be eroded in a significant way," Yu, who now
heads the World Economics and Politics Institute at the Chinese Academy
of Social Sciences, said in response to e-mailed questions yesterday
from Beijing. He declined to elaborate on the assurances needed by
China, the biggest foreign holder of U.S. government debt.
Benchmark 10-year Treasury yields climbed above 3 percent this week on
speculation the government will increase borrowing as President Barack
Obama pushes his $838 billion stimulus package through Congress. Premier
Wen Jiabao said last month his government's strategy for investing would
focus on safeguarding the value of China's $1.95 trillion foreign reserves.
China may voice its concerns over U.S. government finances and the
potential for a weaker dollar when Secretary of State Hillary Clinton
visits China on Feb. 20, according to He Zhicheng, an economist at
Agricultural Bank of China, the nation's third-largest lender by assets.
A People's Bank of China official, who didn't wish to be identified,
declined to comment on the telephone.
"In talks with Clinton, China will ask for a guarantee that the U.S.
will support the dollar's exchange rate and make sure China's
dollar-denominated assets are safe," He said in Beijing. "That would be
one of the prerequisites for more purchases."
Chinese Foreign Ministry Spokeswoman Jiang Yu said yesterday that talks
with Clinton would cover bilateral relations, the financial crisis, and
international affairs, according to the Xinhua news agency.
U.S. government bonds returned 14 percent last year including price
gains and reinvested interest, the most since rallying 18.5 percent in
1995, according to indexes compiled by Merrill Lynch & Co. Concern that
the flood of bonds would overwhelm demand caused Treasuries to lose 3.08
percent in January, the steepest drop in almost five years, Merrill data
show. The yield on the benchmark 10-year U.S. Treasury has risen to 2.80
percent from 2.21 percent at the end of last year.
Chinaâ€™s loss of more than $5 billion from investing $10.5 billion of
its reserves in New York-based Blackstone Group LP, Morgan Stanley, and
TPG Inc. since mid-2007 may increase its demand for the relative safety
"The government will be a net buyer of Treasuries in the short term
because there's no sign they have changed their strategy," said Zhang
Ming, secretary general of international finance research center at the
Chinese Academy of Social Sciences in Beijing. "But personally, I don't
think we should increase holdings because the medium- and long-term
risks are quite high."
Bill Gross, co-chief investment officer of Pacific Investment Management
Co., said on Feb. 5 the Federal Reserve will have to buy Treasuries to
curb yields as debt sales increase. U.S. central bank officials said
Jan. 28 they were "prepared" to buy longer-term Treasuries.
"The biggest concern for China to continue buying U.S. Treasuries is
that if Obama's stimulus doesn't work out as expected, the Fed may have
to print money to cover the deficit," said Shen Jianguang, a Hong
Kong-based economist at China International Capital Corp., partly owned
by Morgan Stanley. "That will cause a dollar slump and the U.S.
government debt will lose its allure for being a safe haven for
China's foreign-exchange reserves, the world's biggest, grew about $40
billion in the fourth quarter, the smallest expansion since mid-2004 as
an end to yuan appreciation since July prompted investors to pull money out.
The world's third-biggest economy grew 6.8 percent in the fourth
quarter, the slowest pace in seven years. Policymakers cut interest
rates by the most in 11 years and announced a 4 trillion yuan ($585
billion) economic stimulus plan in November to spur domestic demand.
Yu said China won't channel its reserves toward stimulating the economy
because its trade surplus is sufficient to fund any import needs.
China's trade surplus was $39 billion in December, the second-largest on
A decline in reserves "isn't likely because of China's huge twin
surpluses," Yu said. China "should diversify its reserves away from U.S.
Treasuries if the value of China's foreign-exchange reserves is in
danger of being inflated away by the U.S. government's pump-priming," he
China may try to link trade and currency policy disputes to its future
investment in Treasuries, said Lu Zhengwei, an economist in Shanghai at
Industrial Bank Co., a Chinese lender partly owned by a unit of HSBC
U.S. Treasury Secretary Timothy Geithner accused China on Jan. 22 of
"manipulating" the yuan to give an unfair advantage to its exporters in
the global market. The currency has dropped 0.16 percent since the start
of this year to 6.8342 per dollar, following a 21 percent gain since a
peg against the dollar was abandoned in July 2005.
"China can also use this opportunity to get a promise from the U.S. not
to make inappropriate requests on bilateral trade and the Chinese yuan,"
Lu said. "We can't afford more yuan appreciation as the economy is
facing a serious slowdown."
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