Chinese
Premier Wen Jiabao expresses his worries about the safety of China’s investment
in the U.S. treasuries. “We have lent a huge amount of money to the United
States,” Wen said at a press briefing in Beijing today. “I request the U.S. to
maintain its good credit, to honor its promises and to guarantee the safety of
China’s assets.”
China
Holds $1.2 trillion US Securities, 45% in long-term Treasures
By
June 2008 China is the largest foreign holder of US securities of $1.2
trillion.
45%
of the holdings are in long-term treasuries. US is running a deficit of $765
billion for the first 5 fiscal months of 2009. Obama and his government is
going to pump more money hoping to stimulate the economy. Chinese government is
worried and shall be worried when simply looking into these numbers. Its
investment is exposed to risks.
China (Mainland) Holdings
of US Securities as of June 2008
|
China Mainland Holdings |
Value (US $, million) |
% of China's Total Holdings |
% of Total US Foreign Holdings |
|
Equity |
99,548 |
8.3% |
3.4% |
|
Total LT Debt |
|
|
|
|
Treasury |
521,912 |
43% |
|
|
Agency ABS |
368,721 |
|
|
|
Agency Other |
158,332 |
|
|
|
Corporate ABS |
6,955 |
|
|
|
Corporate Other |
19,330 |
|
|
|
Subtotal |
1,075,250 |
89.2% |
16.6% |
|
Total ST Debt |
|
|
|
|
Treasury |
13,130 |
|
|
|
Agency |
16,699 |
|
|
|
Corporate |
454 |
|
|
|
Subtotal |
30,283 |
2.5% |
3.5% |
|
Total LT+ST |
1,205,081 |
|
23.5% |
China
is the largest
lender to the US. By June it holds $1.2 trillion US securities, 45%
of it goes to Long-term treasuries. The increased deficit in the US exposes
China to three risks:
First is the credit risk. Chinese government is concerned that, if the U.S.
keeps spending by borrowing, one day it will not be able to pay the money back
as did Russia or Argentina by defaulting all its debts.
Secondly, in a few years the U.S. will expect a soared inflation and interest
hike. As a result, China's investment return will be eroded.
Thirdly,
given the fundamentals of the US economy, US dollar could be weakening vs.
other currencies, including Yuan. China's investment is also exposed to foreign
exchange risk.
Can
China sell the treasuries? No, it cannot. If it sell its treasuries, or even
expresses its intention to sell, the value of treasuries will drop, which will
ultimately hurts China.
