2008 November 18 Tuesday
China Becomes Biggest US Treasury Buyer

China has passed Japan as the biggest holder of US government sovereign debt.

China led all foreign official investors in September by posting a net increase in U.S. Treasuries for the sixth month in the past seven, bringing its total ownership close to $600 billion. Japan was a net seller of Treasuries for the fourth month in the past six.

Some people amazingly see this as a positive development.

“The details of the report paint a much more positive picture of cross-border investments than expected,” said Michael Woolfolk, a senior currency strategist at Bank of New York Mellon Corp. “China, along with others, is showing more demand than anticipated for U.S. assets.”

This guy is a senior currency strategist. What explains his statement? Is he long on US dollars? The Chinese buying of US Treasuries boosts the value of US dollar versus the Chinese currency and therefore makes Chinese goods cheaper in the US and US goods more expensive in China. This increases the flow of goods from China to the US and decreases the flow in the opposite direction.

I tend to think of investments as purchasing of productive assets. By that measure the Chinese government is not investing in the United States.

If China's government did not buy US Treasuries then the interest rate in the US would rise. The higher interest rate would serve as an incentive for more private savings by US citizens. It would also serve as a signal to the US Congress and President that they are spending and borrowing too much. The East Asian purchases of US debt effectively encourages the American people and their leaders to live beyond their means.

Share |      By Randall Parker at 2008 November 18 10:41 PM  Economics Trade

Stephen said at November 19, 2008 12:09 AM:

Given that US households are up to their eyeballs in debt, in the event of interest rate hikes those same households will have to spend more money to service the debt and that will leave even less surplus money available for saving. Multiply the debt by 1,000,000 to take account of highly-leveraged US businesses who will be saddled with ruinously large debt repayment obligations and therefore have no money left to invest in modernisation.

PS: Note that the increase in Treasury bond purchase is because the US Agency bond market is now entirely dead due to investment risk being too high. Instead, the sovereign funds are parking their money in low-risk US-Treasuries in the Lemming-like belief that the US can just print more dollars to cover the debt repayments. In the real bricks & mortar world, US businesses are selling their overseas production assets so they can have money in the bank at home to help ride out the coming hard recession.

Kenelm Digby said at November 19, 2008 3:20 AM:

The last time interest rates in the USA rose sharply (due to Bernanke), the whole sub-prime fiasco was triggered.The fact is that the avarage American saves nothing, is up to his nuts in debt, and only lives from pay-check to pay-check.

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