China is now US No. 1 foreign creditor

The Straits Times
Nov 20, 2008 | 6:00 AM
China - US No. 1 foreign creditor
It now holds US$585b worth of Treasuries, overtaking Japan

SHANGHAI: China is now officially the US government's largest foreign creditor after overtaking Japan, in a development that signals Washington's increasing reliance on Beijing to save its economy.

China became the largest foreign holder of United States Treasuries, owning US$585 billion (S$892 billion) worth as of September, according to US Treasury Department figures.

But analysts warned yesterday that neither country should be celebrating the development, which underlines serious imbalances in the global economy.

'China's GDP per capita ranks around 100th in the world but it is actually subsidising the world's richest country,' said Mr Zhang Ming, an economist with the Chinese Academy of Social Sciences, a government think-tank in Beijing.

He argued that becoming the largest foreign holder of US Treasuries is only an illustration of how serious the imbalances are in China's overly export-driven economy, rather than an indicator of its strength.

China's ever-growing trade surplus, a major source of its massive foreign exchange reserves that is mostly made up of US dollar assets, including Treasuries, hit a monthly all-time high of US$35.2 billion last month.

Throughout the third quarter, China piled more than US$81.1 billion into Treasuries - the safest US assets it could find - while dumping bonds from government-affiliated agencies, such as Fannie Mae and Freddie Mac, said Mr Brad Setser, an economist at the Washington-based Council on Foreign Relations.

That contrasted with the second quarter, when China bought only US$13 billion of Treasuries while buying US$17 billion in agency bonds and US$20 billion of corporate bonds.

'The notion that sovereign investors are always and at all times a stabilising force in the market should be put to rest.

'China has clearly kept (its exchange rate) stable - and been a big source of demand for Treasuries. But it has been a seller of other assets in a time of stress,' Mr Setser said.

China's central bank is considering hiking gold reserves nearly sevenfold to spread risks in its huge foreign exchange holdings, a state media reported yesterday.

The Guangzhou Daily, citing unidentified industry insiders in Hong Kong, reported that Beijing is mulling over a move to increase its reserves to 4,000 tonnes from the current 600 tonnes.

However, China is not likely to suddenly dump US government bonds because it would only be hurting itself now, said Mr Wang Qing, a Hong Kong-based economist for Morgan Stanley.

'If you're the largest holder of one particular asset, it's very hard for you to change,' he said.

China, with the world's biggest reserves at US$1.9 trillion, sees Treasuries as safe and relatively liquid, Mr Wang said.

'The US needs help and I think China and Japan want to help. They don't see an alternative to the dollar right now,' said Mr Andy Xie, an independent Shanghai-based economist.

However, the US Treasury bond market is not risk-free, he said.

'This is another bubble and it will burst,' he said. 'It's just a matter of time. No bubble lasts forever.'

Japan, previously the largest holder of US Treasuries, sold off US$20 billion worth over the third quarter, and as of September held US$573.2 billion worth. That is down from a peak of US$699 billion in August 2004.

AGENCE FRANCE-PRESSE