Chinese premier Wen Jiabao, in his annual press conference, fired a verbal shot across the bow of U.S. asset markets:
Speaking at a news conference at the end of the Chinese parliament’s annual session, Mr. Wen said he was “worried” about China’s holdings of Treasury bonds and other debt, and that China was watching United States economic developments closely.
"President Obama and his new government have adopted a series of measures to deal with the financial crisis. We have expectations as to the effects of these measures,” Mr. Wen said. “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.”
He called on the United States to “maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”
When a country that owns $1 trillion of your debt starts making these noises, it's time to fidget a little.
Or is it? I'll have more to say about this later, but for now it's worth pointing out that China's financial leverage over the United States might not be as great as people think. The Wall Street Journal's Andrew Peaple explains why:
Rhetoric aside, it bears repeating that China will find it hard to make a meaningful shift out of Treasurys, the prime current channel for investment of its $1.95 trillion foreign exchange reserves.
Some say China could switch holdings into gold -- but that market's highly volatile, and not large enough to absorb more than a small proportion of China's reserves. It's not clear, meanwhile, that euro, or yen-denominated debt is any safer, more liquid, or profitable than U.S. debt -- key criteria for China's leadership.
Most pertinent of all, even if China decided to sell off some of its U.S. Treasury holdings, it would scarcely be able to dump that in large blocks. And a partial selloff would surely lead to a slump in the Treasury market, eroding the remaining value of China's portfolio.
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