China’s Strong Shoulder

According to the U.S. Treasury’s latest published data on the national debt, China continues to buy U.S. bonds while remaining the primary market for its goods.

China is the largest holder of U.S. Treasury bonds. By April (the latest available data), it acquired securities worth $7.6 billion from the debt market since the beginning of the year. Now, according to official statistics provided by the U.S. Treasury Department, China owns $1.15 trillion in U.S. national debt.

During the reporting period, Britain also actively bought U.S. securities; the total amount of the U.S. debt in its portfolio reached $333 billion.

Japan sold securities worth about $1 billion. Now it owns $906.9 billion in U.S. debt. It’s understandable; Japan urgently needs money to rebuild its economy, and is trying to find it by any means, including the sale of securities.

As for Russia, it also continued to sell the U.S. national debt it holds. In April, Russia marketed securities worth $2.4 billion, bringing its total amount of U.S. assets down to $125.4 billion. The Russian Federation is listed number eight among countries that own the U.S. national debt.

The situation around the U.S. national debt has become ambiguous and difficult. As a result of the budget deficit, the impending election and the inability to agree to the raise the national debt level due to the bankroll absence, buyers of the U.S. national debt are faced with a serious choice. U.S. Treasury bonds have always been a benchmark of reliability. No one has ever doubted them, at least during recent decades. Now, when the U.S. president talks about a possible default and international rating agencies talk about the possibility of the country’s rating falling, market players either have to believe in the reliability of these securities or shed them immediately in anticipation of the Americans failing to pay off interest as well as theprincipal debt.

In light of the published statistics, an interesting question arises: Why has China resumed buying U.S. bonds during this time of uncertainty? Either the Chinese finance ministry doesn’t believe that the U.S. will default or there are other internal or political reasons. According to Barbara Antipova, financial analyst with 2K Audit-Business Consulting, a subsidiary of Morison International, the U.S.-China relations model, in which China benefits from exports and simultaneously refinances the U.S. debt, has been well-known for some time now. China exports a large amount of manufactured goods to the U.S. At this stage, a weakening dollar and, consequently, a reduction in exports, would be unprofitable for China, especially when a recession in the Chinese economy is expected. Naturally, China is buying up U.S. Treasury bonds, which should support the dollar and increase Chinese exports. “This interaction could also result in China’s influence on U.S. policy growing stronger. In this case, the U.S. economy would rather distance itself from China. However, the U.S. is likely to attempt to use every single opportunity to address the most important problem today, the national debt,” Antipova believes.

Today, the American consumer needs constant relief, which is financed through the issuance of national debt, says Dmitry Kashaev, head of the new product development direction at FG BCS [Broker Credit Service Financial Group]. That is why the U.S. Congress (the Republicans), despite their dissatisfaction with the policy of the Obama administration (the Democrats) will yet again extend the limits of borrowing to complete the social reforms which are the complete responsibility of the current administration. These can be used by Republicans in the 2012 presidential campaign. According to Kashaev, Beijing buys U.S. bonds in order to stabilize the global financial system and, more importantly, to remain the largest market for its exports. China will play a major role in financing the U.S. national debt in the future.

China was the largest holder of U.S. national debt even before the active phase of the so-called quantitative easing program in the U.S. Now that the program has almost exhausted itself (it ends in late June), the Celestial Empire is increasing the trading volume of the U.S. national debt securities again, says the FIBO Group Analytical Department. According to Fibo, “The intent of purchasing U.S. bonds is clear: China wants to send the excess funds in a productive direction, to maintain political relations with Washington and, on a global scale, to consolidate its position in the world. In a political context, Beijing’s position as the keeper of the U.S. national debt is unlikely to exert considerable pressure on the U.S. However, it gives Beijing certain advantages, including on the yuan issue.”

As the Expert Online previously wrote, few market participants believe that the U.S. will eventually default. That’s why there are still more of those in the international financial market who trust the U.S. Treasury bonds than those who are not willing to buy them. In these circumstances, China gets both economic and political benefits that only increase their points in the world game, in which only the lazy can be considered guilty; the “Chinese economic miracle.”