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China Is Trapped In US Treasury Bond Market

2011/8/10 16:37:00 39

Though disappointed with the US fiscal policy, it is the largest foreign country in the United States.

Creditor

China is expected to continue to buy US Treasury bonds, mainly because of the limited investment channels for China's huge foreign exchange reserves.

But the news that Standard and Poor s downgraded the US credit rating at the weekend made China angry with the United States, which is a serious warning to us politicians.

With more than US $1 trillion in US Treasury bonds, China now holds the financial lifeline of the United States.

If China substantially reduces the US

National debt

It will increase the borrowing cost of the US government, consumers and enterprises.

The loss of confidence in US dollar denominated assets will seriously weaken the position of the United States as the world's main reserve currency.

At present, this risk is still very small.

China's foreign exchange reserves exceed 3 trillion US dollars.

The depth and liquidity of other bond markets are not as strong as that of the US market, which is unable to accommodate China's huge foreign exchange reserves. Even in a similar Japanese government bond market, its liquidity is far less than that of the US Treasury market with a size of more than 9 trillion and 300 billion dollars.

Worries over the global economic outlook have been increasing in the past few weeks.

The fiscal problems of the US and the euro area may have a global impact, dragging down the economy of China and other countries.

According to Rachel Ziemba, a senior analyst at Roubini Global Economics, who holds China's treasury bonds, China may not like the fiscal position of the United States, but as a long-term investor and a US trading partner, China needs a strong US, selling US Treasuries will hurt a major Chinese commodity import market and reduce the value of China's foreign exchange reserves weighted by trade.

In a sense, China is tied up.

Selling US bonds or even hinting at selling US bonds has led to huge losses in China and shrinking US dollar assets.

At the same time, the appreciation of the renminbi will hurt the export industry.

Although China has been trying to boost domestic consumption, export industry is still the main driving force of China's economy.

However, in the past few weeks, the US rating and

deficit

The events will prompt China to diversify its foreign exchange reserves, but the process will be slow and gradual.

This trend has been evident in the world: the US dollar now stands at 60% of the world's foreign exchange reserves, down from 70% ten years ago.

Samarjit Shankar, head of global foreign exchange strategy at BNY Mellon in New York, said that China is beginning to lose patience and is increasingly disappointed. "Mellon

Us finances

reform

There is not much time left.

S & P gave the us a negative rating outlook and hinted that the US rating could be lowered again in the next two years.

At the same time, although Moodie (Moody 's) and Fitch confirmed the AAA rating of the United States, Moodie's rating outlook for the United States was also negative.

Joseph Leary, US interest rate strategist at Citigroup Global Markets Inc. in New York, said that if the US rating was further lowered, China would face greater pressure in accelerating diversification of its foreign exchange reserves.