Tags: Roach | China | US | Debt

Stephen Roach: China May Bail on US Government Debt

By    |   Sunday, 27 Oct 2013 04:53 PM

The United States should not dismiss the risk that China may cut back its massive holdings of U.S. government debt, according to Yale University economist and Asia expert Stephen Roach.

Roach, formerly chairman of Morgan Stanley Asia, told CNBC that China’s demand for dollar-based assets such as Treasurys is bound to decline.

"China is on the move with a different [economic] model, and there are enormous consequences for its purchases of Treasurys and other dollar-based assets as a result. America has got to face up to that," he said.

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China is the largest foreign holder of U.S. government debt. CNBC predicted if it cuts its stake significantly, the result could be a spike in Treasury yields, and U.S. interest rates would move higher.

"The U.S. is really not focused on the possibility because they think very smugly, 'Where else are they going to go?' " Roach said of China. But he said China could in fact start "directing their savings at supporting their economy, not just America’s economy."

Roach told CNBC that China’s currency managers administer their portfolios on a risk-adjusted basis and "given the fiasco that Washington just went through, the risk to the ability of Treasurys to hold their value seems to have gone up, and they need to make some adjustments accordingly."

U.S. Treasury data showed China trimmed its holdings of Treasurys to $1.268 trillion in August, down $11.2 billion from the month before.

Quartz reported China is getting out of its U.S. government debt holdings "slowly but surely." When the Federal Reserve finally begins to taper its massive monetary stimulus, the value of U.S. debt holdings is likely to diminish, Quartz said, which gives impetus to China to exit its Treasury portfolio over time.

"It could sell off a chunk of those Treasurys, of course, but that would devalue the rest of its holdings. So we can probably expect China to gradually whittle down its stockpile of U.S. debt while its sovereign wealth funds snap up higher yielding European infrastructure assets," Quartz predicted.

An op-ed piece in The New York Times noted a chorus of Chinese officials criticized the recent U.S. government shutdown and government debt debacle.

"These statements, unusually blunt coming from the Chinese, show that repeated, avoidable crises threaten the privileged position of the U.S. as issuer of the world’s main reserve currency and (until now) risk-free debt," the Times said.

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The United States should not dismiss the risk that China may cut back its massive holdings of U.S. government debt, according to Yale University economist and Asia expert Stephen Roach.
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2013-53-27
Sunday, 27 Oct 2013 04:53 PM
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