China Not A Limitless Sponge For U.S. Debt

[c-rock]

Once the world stops buying, then what do we do to pay for government?

 

Print money?

 

c-rock

 

 

 

China Not A Limitless Sponge For U.S. Debt

Tina Wang, 01.19.09, 12:52 AM EST

Growth of Chinese foreign exchange reserves slows at a time when Washington needs Beijing to buy Treasuries more than ever.

In the past few years, the ballooning of China's foreign exchange reserves seemed a given, the yin to the yang of rising U.S. debt. But growth of the country's reserves slowed last year for the first time in nearly a decade, leading many to wonder if Beijing will slow its Treasury purchases as the U.S. government seeks to ramp up debt issuance to fund stimulus spending.

 

China's foreign exchange reserves climbed by 27.3% in 2008, to $1.9 trillion, down sharply from growth of 43.3% in 2007, based on central bank figures quoted by state news agency Xinhua last week. The Xinhua report attributed the yearly slowdown--the country's first since 2000--to shrinking trade surplus, an outflow of speculative capital and plunging foreign direct investment.

 

 

Yahoo! BuzzThe country's reserves actually diminished in October, for the first time since 2003, plunging by $25.9 billion, even as China's trade surplus reached the third-highest level on record that same month. (See "China's Disquieting Trade Surplus.") Foreign exchange reserves grew by only $5.0 billion in November and $61.3 billion in December, when the trade surplus hit its second-highest level ever because imports fell faster than exports. This implies that the capital account, not the current account, was the primary contributor to the slowdown in reserve accumulations, at least in the month of October.

 

Capital drained out of China during the final few months of 2008, in part as a consequence of Beijing putting the brakes on the yuan's appreciation against the dollar to protect its struggling exporters, leading speculators who had been betting on a strengthening yuan to pull money out of the country. Foreign investors are also withdrawing funds to shore up their own capital bases. Foreign direct investment in China tumbled consecutively each month from August to November--FDI fell by 36.6% in November, compared with last year's corresponding month, to $5.3 billion. Without limitless growth in dollar reserves to play with, China will be less able to absorb U.S. debt issues.

 

To be sure, $1.9 trillion is still a lot. "The reserves are so large that they have little alternative but to hold a substantial fraction in U.S. Treasuries and guaranteed paper," said Harvard economist Richard Cooper, referring to the People's Bank of China.

 

But with growth in foreign exchange reserves losing steam, Beijing can also invest smarter by diversifying: finding bargains in depressed global equities and stockpiling cheap commodities. (See "China Tempted Away From Treasuries.") The government has its ambitious half-trillion-dollar spending package to finance as well. The bottom line is becoming starker: China will buy less at a time when the United States is trying to sell more.

[Slappy]

Its a catch-22 for China though... they have been devaluing their currency for years in order to maintain competitive in the US market.

 

For them now to stop absorbing debt put them in a somewhat precarious position.

 

They wont up the value of the currency if they can, though market forces have been raising it given the volume of production and wealth they are currently generating. If they did, their products become more expensive and thus less attractive to consumers.

 

And they can't stop or slow trade with the US because it actually will devalue their currency.

 

What they will do is what the Chinese have always done in these kinds of the situation... nothing. They will ride it out.