Tags: interest | rates

U.S. Interest Rate At Mercy of Foreigners

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Thursday, 16 Apr 2009 11:18 AM Current | Bio | Archive

Just-released Treasury data for February show China reduced its dollar holdings that month by $13 billion, although it did buy 21 percent of the $22 billion (net) foreigner-purchased U.S. Treasuries.

I don't think this should be considered alarming, not yet, and it is certainly not the beginning of the end of Chinese buying of U.S. assets.

Investors should keep in mind that if they want to know what China's long-term U.S. dollar plans are, they shouldn't look at how many Treasury bills or other U.S. debt they're buying but rather at the yuan exchange rate against the dollar.

As long as that exchange rate remains stable, China has changed its U.S. dollar strategy. In the meantime, China will buy only as much U.S. debt as it needs to maintain a stable exchange rate.

If we see a rapid rise in the yuan relative to the dollar, then we need to start worrying about a change in their plans. That's not the case today.

Also yesterday, the U.S. Treasury released its semi-annual foreign exchange report, the first since Timothy Geithner became Secretary.

The report refrained from labeling China as a currency manipulator, although it did mention that the Chinese yuan remains "undervalued."

What's much more worrisome, in my opinion, is that Treasury data show foreign demand for U.S. assets other than short-term Treasury bills has practically dried up. Net foreign purchases of long-term U.S. securities were $20.8 billion.

Of this, net purchases by private foreign investors were $25.9 billion, and net purchases by foreign official institutions were negative $5.1 billion.

This doesn't bode well for U.S. interest rates, which will have to go up in order to raise appetite for foreign buying of U.S. Treasuries or the Fed will have to buy most of the Treasuries that will come online in 2009 and 2010.

Meanwhile, China's GDP rose 6.1 percent year-on-year the first quarter, which is the worst quarterly performance since records began in 1992. It's down from 9.1 percent growth in September 2008 and 7 percent in March 2009.

Bottom line: China can't save the world.

Li Xiaochao, spokesman for China's National Bureau of Statistics said: "The national economy is confronted with the pressure of slowdown … affected by the international financial crisis, the demand for exports has decreased significantly. This has led to profit slump for businesses, reduction in fiscal revenue and mounting employment difficulties … the foundation is not firm; the task is still very arduous."

Fixed-asset urban investment rose 30.3 percent year-over-year in March, up from 26.5 percent over the first two months of the year while industrial production rose 8.3 percent in March up from 3.8 percent in January and February.

Also in March, retail sales rose 14.7 percent, down from 15.2 percent previously, while consumer prices fell 1.2 percent year over year from February's fall of 1.6 percent, which was better than the consensus forecast of negative 1.4 percent.

Finally, producer prices fell 4.6 percent year-over-year in the first quarter as a whole.

In China, even with all the government intervention, deflation risks continue to trump inflation risk.

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HansParisis
Just-released Treasury data for February show China reduced its dollar holdings that month by $13 billion, although it did buy 21 percent of the $22 billion (net) foreigner-purchased U.S. Treasuries. I don't think this should be considered alarming, not yet, and it is...
interest,rates
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2009-18-16
Thursday, 16 Apr 2009 11:18 AM
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