By Noah Graff

Today’s Machining World Archive April 2009 Volume 5 Issue 04

"News conference of the Third Session of the 11th National People's Congress (NPC) on the enhancement and improvement of macro-economic control held at the Great Hall of the People in Beijing, China, March 6, 2010. (Xinhua/Li Ziheng)

Utilizing its enormous trade surplus, China has become the largest holder of U.S. treasury bonds.

If the U.S. buys fewer goods from China, will China buy fewer American bonds?

Over the long run, the U.S. will inevitably buy less from China, simply because U.S. households will have to save more and consume less to repair their financial problems. That means that over the long run, China will have less of a trade surplus and will add less to their official foreign exchange reserves. Their new trend of buying all types of foreign assets, of which treasuries are the most important, will also slow down. But in the short run, there is no close link between U.S. buying decisions and Chinese decisions over how they hold their foreign exchange assets. In fact, China wants stability in those holdings.

Professor Barry Naughton
University of California, San Diego

I foresee that China will continue to buy U.S. dollar denominated debt, particularly that which is guaranteed by the full faith and credit of the U.S. government. In the volatile market condition that we’re in today you should be seeing that China is buying more U.S. treasuries as long as China’s export machine continues to churn out billions of dollars worth of export trade surplus on an annual basis. Whether China exports more or less to the States has no impact at all. If they don’t export as much, the Chinese government still has to find a place to invest its U.S. dollars because China in the foreseeable future is the world’s biggest exporter of goods and services.

Benjamin Wey
President, New York Global Group, Inc

It depends on why the U.S. is buying less goods. There are three scenarios—number one is that the U.S. purchases less goods due to the general economic decline, number two is that competitive forces arrive in the U.S. and they are able to produce certain products for the same cost as China, number three is that there is a political backlash against imports from China through tariffs or some other political activism. In the case of the first two scenarios, I do not believe that the Chinese will reduce the purchase of U.S. securities because they are still the highest grade debt in the world today. However, in the third scenario, I believe that tariffs or some other political activism mixing economics and politics could cause the Chinese to use their leverage in the bond market to create pressure on the United States.

Robert Newman
The Newman Law Firm PLLC

The facts:

After making direct net purchases of $46 billion in bonds from Fannie Mae and Freddie Mac in the first half of 2008, China’s government and companies were net sellers of $26.1 billion in the five months through November 2008.

The Wall Street Journal

China owned $727.4 billion of U.S. treasury bonds by end of 2008. In December 2008, it bought $14.2 billion of U.S. bonds.

U.S. Department of the Treasury.

China’s exports plunged 17.5 percent, to $90.45 billion, in January 2009, compared with the previous year. However, its imports dropped even further, by 43.1 percent, or $51.34 billion, reported China’s Xinhua news agency.

CNN.com

How the Chinese banking system works.

When Chinese companies export goods they are paid in dollars. They exchange the dollars for Yuan at local Chinese banks who are then required to turn over money to the People’s Bank of China (China’s central bank). Unlike in other countries, small banks in China cannot invest how they choose. The Chinese government decides what to do with the surplus.

Reasons for China to keep money in the U.S.

• Safety benefits of keeping money overseas.
• Creates a “connection” or leverage with the U.S.
• The government is concerned about inflation if too much money is spent domestically.
• It’s a solid investment.