Something is stirring in US-China relations, and it’s not nice, and it could damage the global economy.
Last week it was the Chinese using its Xinhua newsagency to announce moves to support the country’s four biggest banks with strategic share purchases, then the outlet announced a broad aid package for small business after reports of a credit crunch hitting businesses across the country.
This week Xinhua reported that China has sold more than $US 36 billion in US government debt in August after the country’s credit rating was cut to AA by Standard & Poor’s.
That came after the US Senate passed a resolution that recommended sanctions against countries (read China) thought to be guilty of manipulating their currencies).
Those sanctions would include penalty tariffs on imports from those countries into the US, a measure that would be illegal under World Trade Organisation rules.
Then yesterday a more dramatic story appeared under the headline "Time for China to dump U.S. debt?".
China is America’s banker, holding more US government debt than any other country. Japan, South Korea and the UK are also big holders, but China’s $US1.137 billion outstrips those countries.
The sale in August followed $US8 billion of purchases in July, according to Xinhua.
China had $US3.2017 trillion of foreign reserves at the end of September, up from $US3.265 trillion at the end of July and $US2.9317 trillion in January.
The figures are based on US Treasury department figures released earlier in the week.
These figures understate Chinese dealings and holdings (a more accurate set of figures will be released in 10 days) because they are based on geographic purchases and sales, and China quite often buys through London, as well as from Beijing.
The figures show that the UK lifted its US Treasury holdings to $US397.2 billion in August, a rise of 2.4% compared with July. Japan’s holdings rose to $US936.6 billion, up from $US914.8 billion in July.
So China’s move stands out, and can be justified by the S&P downgrade and growing concern in China (and in the UK and Japan) that the prospect of ultra low interest rates will cost holders of US debt billions of dollars.
That’s why China and other countries have started buying other debt, such as Australia’s and some European securities.
The sale was made before the US Senate approved the resolution calling for penalties on countries with low currencies, but the timing of the Xinhua article about the possibility of dumping the dollar came after the latest vote.
It therefore should be seen as a warning to the US Government, Congress and anyone else.
The Xinhua article stated:
"Although China trimmed its U.S. government securities in August by a hefty 36.5 billion U.S. dollars, the country remains the United States’ largest foreign lender.
"The cut in August, the biggest move in at least two years, reflected concerns over safety of the Treasuries as the U.S. was stripped of its AAA credit rating, according to analysts.
"The move may suggest that policymakers in the world’s fastest-growing major economy are mulling over safer ways, amid the global market turmoil and the depreciating dollar, to invest its gigantic foreign exchange reserves."
The last time China dumped US Government debt was in June, 2009, when it sold $US25.1 billion worth of Treasury securities.
"It’s a normal investing action in the market, though it’s definitely related to the fluctuation caused by the S&P’s downgrade on the U.S. in August," said Guo Tianyong, economics professor with the Central University of Finance and Economics in the Xinhua report.
"Despite being a regular market move, the record drop of China’s holdings of U.S. Treasuries may still add to market woes, as it revealed market concerns over the "dollar trap," economists noted.
"China has run a current account surplus and a capital account surplus uninterruptedly for more than two decades. Inevitably this has led to an accumulation of foreign reserves," Yu Yongding, an economist with the CASS, wrote in an article published recently.
"He declared that China was caught in a "dollar trap" as it had to amass the dollar-denominated assets, despite the fact that risk of a depreciating dollar kept rising.
"When China decided to slash a sizable amount of U.S. Treasuries in June 2009, the greenback had been losing value for months.
"Loaded with an excess of dollars, the world’s largest exporter is facing a quandary: on the one hand, a weaker dollar could mean a big capital loss for China.
"On the other hand, the dollar is still deemed as a flight-to-safety compared with other investments. Thus the country seems stuck in the "dollar trap."
"There is no clear evident that we are reducing our holdings of the U.S. Treasuries systemically and unremittingly," said Zhang.
"But whenever the dollar is depreciating, our foreign assets, with such a large portion being dollar-denominated, can hardly stay immune from the loss.
"Economists agree that as the United States’ largest foreign creditor, China should contemplate ways to pull itself out of the "dollar trap," as the U.S. economy is faltering with its debt piling up and its currency on the brink to depreciate.
"China must make fuller use of the non-financial a
