China Tells US and Europe to Protect Economies

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China has been increasingly vocal to foreign ministers and central bankers since the credit crunch. The country has been a net purchaser of US Treasury bonds and bills and also continues to make large acquisitions in foreign companies. China’s current trade imbalance allows the country to purchase billions of dollars worth of foreign holdings each year, something it has now been doing for more than a decade.

China Owns the Most

China’s world holdings are the world’s largest at a whopping $1.95 trillion. Their status as an economic superpower allows them to discuss policies with the rest of the world, which is largely funded by Chinese purchases of government debt.

Credit Rating Worries

The Chinese government began to voice its concerns over worries about its portfolio in the economic crisis. Future write-downs or a change in credit rating could easily affect China’s debt portfolio. A stern statement was issued as a general warning to the US and Europe that the countries must do whatever they can to stimulate and maintain their economies.

Long Dated Sell-off

China has been making big moves with their treasury holdings as of late by selling off long dated Treasury bonds and buying up shorter lived Treasuries. Many economists think this may be the beginning of an exit strategy for China, as selling long dated Treasuries removes the risk of being locked in for the long term, while short term Treasuries can be redeemed every 1-3 months. Taking short dated Treasuries affects the overall return of China’s portfolio, but it appears that China is willing to accept lower income for security. This is the leading indication that the Chinese Treasury is attempting to exit, rather than simply swapping for differing expiration dates. Current yields on short term Treasuries are near zero, especially when considering the yield is annualized and not extrapolated each month.

No True Measure Provided

It’s hard to predict exactly what China wants out of the global economies. Obviously, for them, the importance lies in protecting their portfolio, but some inflationary steps that the US government has taken have been widely accepted in China, even as it might devalue their own holdings. The US dollar has performed relatively well in the recent slowdown after improving against most world currencies, subsequently boosting China’s relative holdings.

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