Sunday, January 18, 2009

China: We own too many US bonds

China is expected to ease its spending on US debt as growth in its foreign exchange reserves slows and Beijing seeks to fund its own economic stimulus plan, analysts say.

US President-elect Barack Obama has proposed a stimulus bill expected to total at least 775 billion dollars that he has acknowledged would drive the US deficit significantly higher -- and require financing from overseas....

Beijing also warned last month it would not keep lending money to the US economy indefinitely, in an editorial in the government-run China Daily -- an English-language newspaper aimed at a foreign audience.

"China's increased purchase of US Treasury securities should not be interpreted as an endorsement of the assumption that the US can borrow its way out of the current financial crisis," it said in an editorial.

But at the same time, the editorial added any halt in Treasury purchases could push US interest rates up and undermine Washington's efforts to bail out the economy. That, in turn, would hurt China's exports....

"There are chances that America may sink into a second round of the financial crisis... we have no idea when the US economy will bottom out," Bank of Communications economist Lian Ping said.

"If we increase the variety of China's overseas investments, we can better avert crises and risks," he said.

But China's options are limited as the largest owner of US Treasuries, said He Jun, an economist with the Beijing-based Anbound Consulting.

"We have bought too many bonds," He said. "So if globally investors' confidence in the US government shatters, we could suffer massive losses."

"There are political considerations too, the US and China have an unspoken agreement to maintain economic stability. The reality is we have little choice."

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