China's hate-love-hate relationship with American debt.

Posted By Daniel W. Drezner Thursday, February 12, 2009 - 8:00 PM Share

Hate: 

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.

Love, mixed with a lot of hate: 

China will continue to buy US Treasury bonds even though it knows the dollar will depreciate because such investments remain its “only option” in a perilous world, a senior Chinese banking regulator said on Wednesday....

Luo Ping, a director-general at the China Banking Regulatory Commission, said after a speech in New York on Wednesday that China would continue to buy Treasuries in spite of its misgivings about US finances.

“Except for US Treasuries, what can you hold?” he asked. “Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.”

Mr Luo, whose English tends toward the colloquial, added: “We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.” (emphasis added)

Well, there's mostly hate going on -- but keep that bolded section in mind the next time someone mentions the prospect of China exercising its creditor power. 
EXPLORE:GLOBALIZATION, BRETTON WOODS II, CHINA, DOLLAR, FINANCIAL MELTDOWN
 

RENEGADE

9:25 PM ET

February 12, 2009

Spotted that this morning and

Spotted that this morning and was confident that we'll be seeing this quote in many books, articles, and presentations over the next few years. It's an absolute classic for any discussion of financial interdependence between the two countries. Am just surprised it was confined to the market supplement of the newspaper.

 

SJC

9:45 PM ET

February 12, 2009

This sounds a lot like last

This sounds a lot like last year's Valentine's day...

 

DON S

12:46 AM ET

February 13, 2009

Difficult coil to unravel

I almost feel sorry for the Chinese bankers. On the one hand the portion of their portfolio invested in US Treasuty bonds almost certainly was the highest-performing part last year. With share markets crashing and the Euro declining the 14% appreciation of treasuries worked nicely for them,
but at the cost of deflation in the US. In the best of all worlds the US would run a deflationary policy, which would further appreciate their investment at the cost of social unrest in the US. Win-win, from their POV.

But the US isn't doing that, it's running inflationary policy instead. That might allow their export business with the US to revive in the long term, but might take away all of last year's gains, and more.

They will naturally blame the US, but a major part of their policy has been to manipulate exchange rates to stimulate exports to the US, so they can hardly dump their bonds without reversing that export-driven policy.

 

BRETT

3:21 AM ET

February 13, 2009

It's their fault. They fell

It's their fault. They fell smack into the "Chimerica" trap, which was all secretly a plot to enslave China into our financial system in order to allow us to better ourselves in the long-term.

I'm kidding, of course - or am I?

 

DON S

11:52 AM ET

February 13, 2009

Sneaky plot, Brett

It's particularly sneaky in that it traps both sides. It's not any more comfortable for the US owing the debt to China than for the Chinese holding it. If the Chinese sold the bonds the dollar would fall, perhaps to the level it was 9 months ago, but the US economy would become more competitive globally, while the cost of Chinese goods would rise.

This probably will happen in the long term. China needs to move it's export sector upmarket and develop it's internal market, which will require capital. The less dependent they can make themselves on the US and European markets the more freedom of action they will have. But that also frees the US and Europe to a similar degree, I think.

The other possibility is that the global depression will hit China disproportionally hard, and the CCP may lose the 'mandate of heaven'. I hope that doesn't happen too quickly because the consequences would be traumatic....

 

BLUE13326

7:08 PM ET

February 13, 2009

They have no place else to

They have no place else to go. The EU economy is now officially shrinking faster than the US (with Germany's GDP now contracting at around an 8% annual rate), and the Asian economies are in freefall. They have to hope the US can somehow stimulate demand for their exports.

 

DON S

4:03 AM ET

February 14, 2009

Do you have a source for that, Blue?

I googled "German GDP contracting" and got a link from the FT which says German GDP contracted more last quarter than the Brits did, by 2.1%. It wasn't clear from the context whether it was an absolute figure or year on year.

http://www.ft.com/cms/s/0/8734ea88-f9a7-11dd-9daa-000077b07658,dwp_uuid=70662e7c-3027-11da-ba9f-00000e2511c8.html

8% would be a shock. 2.1% isn't surprising given how many German exports go to Eastern Europe and Russia, both of which are relative basket-cases. They lost a lot from the Iceland and Irish collapses.

 

DON S

4:12 AM ET

February 14, 2009

German 2.1% decline was q on q

I found a link on the Australian which said the decline was q to q. Which would extrapolate to 8.4% a year, pretty horrible. The forecast for Europe as a whole is a 3.3% decline, and I imagine the US is as bad.

It's hard to tell what this means for China, where people are still forecasting 5% growth, but at least 20 million jobs have been lost (that the government admits to). But the chinese economic statistics section is small, and the country has a reputation for manipulating their statistics as readily as their currency, so.....

We don't know how bad it is in China. I doubt if the government knows how bad it is!

 

DON S

9:56 AM ET

February 14, 2009

Bad news cascades

I found a link from the WSJ, which states that Japanese figures may make the Germans look good by comparison.

http://online.wsj.com/article/SB123450943022881895.html

Germany and the UK are down 5.9% annualized, Estonia 9.4%, Hungary 2%, and Japan is forecast to be down 12% annualized maybe! The US is down 3.8% annually, although that figure is expected to be revised for the worse soon.

Hard to say what that means for China, because Germany and Japan are high-end exporters while China is on the cheap end of the market.

Anyway, that explains why the Chinese bankers see no alternatives to US bonds at this point. Much of the Eurobond sector (Italy, Spain, Greece, Portugal, Ireland) is an ongoing disaster (as is the UK), Germany is about to feel the bite badly, and Japan sounds like it may be worse than Europe.

 

BLUE13326

9:14 PM ET

February 14, 2009

True, but if you look at the

True, but if you look at the recent trade data, it's likely 4th Q US GDP is going to have to be revised down to around minus 5%.

I think, though, the big story in the 2nd half of this year will be the massive European bank losses, which will make the US bank losses look tiny by comparison. A write-down in the area above $20 trillion, according to a recent European Commission report. Many of these banks had leverage ratios of like 50:1. And without a central bank that can step in and save select banks, I don't see how they get out of it without undergoing massive pain.

 

DON S

9:31 PM ET

February 14, 2009

Good points

I hadn't heard that things are that disasterous in Europe, but it does seem to be a fact that European banks are far more exposed to potentially bad loans internationally than their US counterparts. Quite a bit of Eastern Europe is in very bad shape, notably the Baltic states, Ukraine, and perhaps Romania. Even Poland, Hungary, and the Czech Republic & Slovakia are sliding for similar reasons to Iceland's fall - large loans denominated in Euros or Swiss francs combined with plunging exchange rates.

But that is just the start. Spain is caught in a double-whammy. Exposure to Latin America perhaps twice the US level, and a collapsing housing sector at home perhaps comparable to the worst regions in the US. Britain is heavily exposed in the Far East & at home, while German banks are exposed to Russia, Eastern Europe, Iceland, Ireland, and lord knows what else. Pretty much any market Germany exports to, German banks will have exposure to. Not sure whether the French have big problems anywhere except maybe the Middle East.

 

J B BLALOCK

3:02 PM ET

February 16, 2009

China on US Treasuries

They can't get out of the corner they've painted themselves into

Certainly they can't sell their US Treasury bonds. (They'd cut off their nose to spite their face)

They have to keep plowing their export earnings into some type of major reserve currency. Their question is which on: USD, Euro or Yen) On a relative basis, the USD bonds, including agency bonds, are likely to perform best on a relative basis over the next few years..

 

Daniel W. Drezner is professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University.

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