China bought $3 billion more US Treasury debt and expanded the scope of imports from the US in what are seen as measures that will result in the Yuan appreciating against the US dollar. China, sitting pretty on $2.5 trillion forex reserves has been buying debt of Japan and South Korea as well. China has been a major buyer of Japanese debt this year, having snapped up $27 billion worth in the first seven months. It also doubled its holdings of South Korean debt, to $3.4 billion in the first half of this year.

Article by Wang Bo and Tan Yingzi
China Daily
Publication Date : 18-09-2010

China increased its holdings of United States treasury debt in July after two months of net sales and economists say it is unlikely Beijing’s appetite for US assets will fade in the near future as two of the world’s largest economies become increasingly interdependent.

China’s holdings of treasury bonds rose slightly to US$846.7 billion in July after two months of declines, the US Department of Treasury reported on Thursday.

The news allayed concerns that Washington’s largest creditor was moving away from investing in dollar assets.

Coincidentally, the debt data came out at the same time as two congressional hearings were being held in the US on China’s exchange rate policy. The hearings were attended by Treasury Secretary Timothy Geithner, who called for “a significant and sustained appreciation of the yuan over time” and “a more balanced economic relationship”.

Economists said the ongoing debate over China’s exchange rate and fears about dwindling demand for US treasuries reflected increasing interdependence between the US and China, which is likely to become the world’s second largest economy this year.

In the testimony to the hearing at the House committee of ways and means, Geithner acknowledged that the two countries “have significant economic interests” in their relationship and highlighted the importance of the Chinese market on the US economic recovery.

“A strong and growing China benefits the US, just as a strong and growing US is good for China,” Geithner said.

During the first seven months of this year, US exports to China surged 36 per cent year-on-year. At the same time, China’s exports to the US grew by 21 per cent.

China has become the US’ third-largest export market and now accounts for 6.8 per cent of the country’s total overseas sales.

Yao Jian, commerce ministry spokesman, said on Wednesday the two economies are highly complementary and pledged to boost bilateral economic ties by purchasing more goods from the US.

Yao said a Chinese trade delegation led by Wang Chao, the vice-minister of commerce, is visiting the US and seeking trade and investment opportunities in the energy and technology sectors.

Given the uncertain global and European economic prospects, however, China is not likely to make major adjustments to its US debt investments, predicted Zhang Xiaojing, an economist with the Chinese Academy of Social Sciences.

“China’s holdings of US debt may not fluctuate much in the coming months,” Zhang said.

And economists said the fact that China had bought more treasury bonds does not mean it has stopped diversifying its foreign exchange reserve portfolio.

China has been a major buyer of Japanese debt this year, having snapped up $27 billion worth in the first seven months. It also doubled its holdings of South Korean debt, to $3.4 billion in the first half of this year.

“Though there is no direct relationship between China buying into the yen and dumping dollar assets during the past few months, it was a good option to diversify the country’s colossal foreign exchange reserves on the debts of countries with strong trade ties to China,” said Jinny Yan, an economist at Standard Charted Bank.

Experts also noted that it is essential to make sure that cooperation between China and the US is not derailed by exchange rate disputes.

“If the benign relationship in economic areas is dampened due to the exchange rate rift, it is highly likely that there will be a negative impact on China and US cooperation in other crucial areas, such as security and diplomacy,” said Shi Yinhong, a senior scholar in American studies at the Beijing-based Renmin University of China.

“China and the US maintain a relatively low level of cooperation and limited strategic trust on security issues. The increasing interdependence of China and the US is mainly in the area of economy and finance,” he added.

Wang Bo reported from Beijing. Tan Yingzi reported from Washington. Ding Qingfen and He Wei contributed to this story.

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