The New York Times has a fascinating article on how China is cutting back on its purchases of U.S. Treasuries. In the first two months of this year, the Chinese government was a net seller of Treasuries.
China is a gigantic player in the market for our Treasury debt. Two-thirds of the Chinese central bank’s $1.95 trillion in foreign currency reserves are held in dollars. But that number may fall in the years ahead.
The article notes:
“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.”
Premier Wen Jiabao recently said he wasn’t pleased with how we’re running our economy. I’d have to agree and considering the size of his country’s investment, I can understand his concern. But it’s pretty embarrassing to have a Communist official criticizing our capitalist economy.
The article goes on to say:
“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.”
The Treasury market will find substitutes, but that can’t last forever. The fact is that the government’s borrowing binge has placed the dollar under enormous pressure and it’s due to fall.