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China Turning Its Back on U.S. Debt

By    |   Thursday, 08 Jan 2009 11:37 AM

China may finally be tiring of taking on U.S. debt, after gobbling down more than $1 trillion in Treasury-issued bills over the past few years.

As China’s own economy slows dramatically — a direct result of the U.S. recession — Beijing seems intent on spending on its own massive stimulus plan rather than financing U.S. needs at very low interest rates.

Fitch Ratings says China’s foreign reserves will rise by $177 billion this year, down from an estimated $415 billion increase last year, The New York Times reports.

“All the key drivers of China’s Treasury purchases are disappearing — there’s a waning appetite for dollars and a waning appetite for Treasurys, and that complicates the outlook for interest rates,” Ben Simpfendorfer, an economist in the Hong Kong office of the Royal Bank of Scotland, told the newspaper.

If Chinese demand for American debt sags enough, expect interest rates to rise eventually. Chinese demand has kept rates by lower by virtue of the fact that China wanted to buy more than the United States needed to sell.

Now that trend is reversing on both counts: The United States needs more money than ever, and China is focusing on internal spending more than external investments.

Changes to Chinese banking laws also will affect demand, reports the Times. China’s central bank requires a fifth of all private bank deposits to sit in its vault, which the bank uses to buy foreign debt in order to build up significant reserves.

Having such huge reserves helps the country defend its currency against speculative attack, letting China keep the yuan artificially weak — as U.S. officials have consistently charged — which in turned helped China’s exporters build up a huge base, often at the expense of other foreign producers.

Now that the country has hit a wall and is seeing its economy weaken, the central bank is instead asking banks to lend more within China. That means less money is available to buy U.S. bonds.

Other factors, including a decline in foreign demand for Chinese goods, also matter.

As foreigners buy less from China, less foreign money enters the economy, so there is less of a trade surplus. That huge Chinese trade surplus in part financed the massive buying of U.S. debt.

Nevertheless, experts say the decline in Chinese demand for U.S. debt might not mean rising interest rates soon.

“The likely scale of China’s reduced purchases will not be enough to overwhelm other global factors that are pushing down rates,” Brad Setser, a fellow at the Council on Foreign Relations in Washington, told Bloomberg.

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China may finally be tiring of taking on U.S. debt, after gobbling down more than $1 trillion in Treasury-issued bills over the past few years.As China’s own economy slows dramatically — a direct result of the U.S. recession — Beijing seems intent on spending on its own...
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Thursday, 08 Jan 2009 11:37 AM
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