China sold $34bn (£21.5bn) worth of US government bonds in December, raising fears that Beijing is using its financial muscle to signal that it has lost confidence in American economic policy.
US treasury figures for the period ending in December 2009 show that, following the sale, China is no longer the largest overseas holder of US treasury bonds. Beijing ended the year sitting on $755.4bn worth of US government debt, compared to Japan’s $768.8bn.
Since the sub-prime crisis that began on Main Street USA grew to engulf the global economy, China’s leaders have repeatedly expressed concerns about US policy. December’s $34bn sell-off made only a tiny dent in Beijing’s total holdings of US assets, which amount to well over $1tn when stakes in American companies, as well as treasury bills, are taken into account.
But the news intensified concerns about China’s appetite for bankrolling ever-widening American deficits. Premier Wen Jiabao told reporters last year: “We have made a huge amount of loans to the United States. Of course we are concerned about the safety of our assets. To be honest, I’m a little bit worried.”
When Timothy Geithner, the US treasury secretary, visited China last summer, he sought to reassure his hosts, using a speech to promise that “the United States is committed to a strong and stable international financial system. The Obama administration fully recognises that the United States has a special responsibility to play in this regard, and we fully appreciate that exercising this special responsibility begins at home.”
But Allan Meltzer, an economics professor at Carnegie Mellon University, said China’s bond sales should be a wake-up call for Washington. “The Chinese are worried that we have unsustainable debt levels, and we do not have a policy for dealing with it,” he said.
China’s sales contributed to a record drop in foreign holdings of short-term treasury bills in December: in all, net overseas holdings of short-term bills fell by $53bn. The previous record was $44.5bn in April last year.
However, there was little sign that world investors as a whole have lost their confidence in the dollar as the safe-haven currency of choice: overall, the US saw a net inflow of $60.9bn, as investors more than offset sales of short-term debt by buying longer-term securities and shares.
Japan, Britain, Luxembourg and Hong Kong made sizeable purchases, with the UK buying $24.9bn of US government debt.
Some analysts warned that it would be a mistake to read too much into one month’s data, particularly since the current crisis in the eurozone makes investors’ main alternative to the dollar look particularly unattractive.
David Wyss, chief economist at Standard & Poor’s in New York, said: “China may not be too happy with us right now, but you have to ask: what else are they going to do with their money?”
Ho-fung Hung, author of China and the Transformation of Global Capitalism, said it was hard to tell whether China had a long-term strategy for selling US debt. “I think decision-makers know very well that any large-scale selling of US treasuries won’t do any good to the Chinese economy, which still needs a sustained recovery of the US economy to pull up its export sector. Such selling will also devalue China’s existing holdings of treasuries,” he said.
“Dumping treasuries will also entail the problem of what to buy in return – definitely not euro or yen assets at the moment.”
However, America must sell an unprecedented volume of treasuries in the coming years to finance its record deficit, and pay the cost of bailing out Wall Street and kick-starting the economy with a $900bn stimulus package. Any evidence that foreign investors are beginning to doubt Obama’s promises to bring the public finances under control will spread alarm in Washington.