China’s veiled threat to buy fewer US Treasurys is an empty one

By Gwynn Guilford

China's criticisms of the US are mainly posturing. 
The Washington game of chicken on the US borrowing limit is starting to make China, the US’s biggest creditor, a little nervous. 

Zhu Guangyao, vice finance minister, today exhorted the US to “to ensure safety of Chinese investments”, saying that the Chinese government “hopes the United States fully understands the lessons of history.” 

An Oct. 2 editorial in Communist Party mouthpiece Xinhua scolded that the US “has engaged in irresponsible spending for years.”
By “lessons of history” Zhu presumably meant the July 2011 budget showdown that prompted the rating agency Standard & Poors to downgrade US debt. 

After that point China’s holding of US Treasurys declined significantly (see chart below). 

It then rose again, but has recently fallen back. 

Zhu seemed to be hinting today that if the US continues to engage in debt brinkmanship it’s at risk of losing its biggest creditor. 

That would drive up the interest it has to pay and worsen its debt situation.
However, the truth is that whether China buys US government debt has far more to do with its trade balance and capital flows than with the shenanigans in Washington. 

First, here’s a look at China’s Treasury holdings:

​China’s central bank, the People’s Bank of China (PBOC), ties the yuan’s value closely to the US dollar. 

To do so it must buy dollars that come into the country from exporters and foreign investors when China exports more to the US than it imports, and when more investment is flowing into China than is flowing out. Those dollars go into the PBOC’s reserves. 

In order to make some return on them, it invests them in US government debt, the only market big and liquid enough for the size of its purchases.
But the central bank’s foreign-exchange reserves plateaued around mid 2011, shooting up again in the beginning of 2013:

​So China stopped buying Treasurys in 2011 not because of the US debt wrangling but because it had more or less stopped accumulating extra reserves with which to buy them. 

And that didn’t change until January 2013, in the wake of a new wave of speculative money flowing into China.
This all tells you how little the US needs China to run its deficit, says China expert Gordon Chang. 

“The Chinese have not in fact been funding the Federal deficit since the middle of 2011,” writes Chang in a blog post on Forbes.com, noting that markets didn’t panic as a result.
Plus, China’s finger-wagging is absurd, given that its own currency manipulation has caused it to amass so many dollars. 

As we’ve argued before, the less China manipulates its currency to run a trade surplus, the greater the benefit to the US economy—and the less debt the US will need to issue debt in the first place.

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Obama’s Absence Leaves China as Dominant Force at APEC

By JANE PERLEZ and JOE COCHRANE
Xi Jinping arrived at the Asia-Pacific Economic Cooperation summit on Monday.

NUSA DUA, Indonesia — Secretary of State John Kerry sat in the chair reserved for President Obama at the opening session of the Asia-Pacific Economic Cooperation summit meeting on Monday, leaving China’s leader, Xi Jinping, as the dominant leader at the gathering, devoted to achieving greater economic integration in the region.
Mr. Obama, who canceled his appearance at the meeting to try to resolve the government shutdown in Washington, had planned to use his personal persuasion to push forward negotiations for the Trans-Pacific Partnership, a trade bloc that is led by the United States and that excludes China.
A statement by foreign and trade ministers painted a fairly gloomy economic forecast for the 21 members of the Asia-Pacific Economic Cooperation group as the leaders met at an international conference center on the Indonesian island of Bali.
“Global growth is too weak, risks remain tilted to the downside, and the economic outlook suggests growth is likely to be slower and less balanced than desired,” the ministers said.
To overcome the slow growth, it is imperative for the group to agree on a “comprehensive series of structural reforms so as to increase productivity, labor force participation and high-quality job creation,” the statement said.
According to data from the group, its members account for about 40 percent of the world’s population, 55 percent of global gross domestic product and about 44 percent of world trade. 

Trade within the group has grown nearly sevenfold since it was founded in 1989, topping $11 trillion in 2011.
The American trade representative, Michael Froman, said the Obama administration remained committed to trying to complete the negotiations for the Trans-Pacific Partnership by the end of the year.

“Our message is ‘Let’s get this done as soon as possible,'” Mr. Froman said in an interview. 

The Dec. 31 goal is “ambitious, but it’s doable,” he said.
The partnership, a major element of Mr. Obama’s pivot toward Asia, is intended to achieve open market access among the 12 participants, with the United States, Japan, Mexico and Canada as the major economies.
The administration was hoping that the leader of South Korea, Park Geun-hye, would announce at the meeting that South Korea was ready to join the negotiations. 

But South Korean officials said Ms. Park would not make that declaration in Bali.
The absence of Mr. Obama took some gravitas out of the conference, and there were deep questions about how the president could get a trade pact through Congress given the hostility of conservative Republicans in the House toward his domestic programs.
The prime minister of Singapore, Lee Hsien Loong, who maintains friendly relations with China, was the most direct in describing the damage to the summit meeting by Mr. Obama’s absence.

“No other country can replace” the American engagement in Asia, he said.

“Not China, not Japan, not any other power. That is something which we continue and encourage at every opportunity.”
President Bill Clinton canceled a trip to the group’s summit meeting in Japan in 1995, and was able to recover American prestige in the region, officials said. 

But the far greater competition for influence between the United States and China and the dynamic economies of Asia make the region far more important to Washington now.
On the sidelines of the summit meeting, Mr. Kerry met with the Russian foreign minister, Sergey V. Lavrov, and the two diplomats expressed satisfaction with the progress of the destruction of chemical weapons in Syria by international disarmament inspectors. 

The first weapons, including missile warheads, were destroyed Sunday, Mr. Kerry said.
“It is a good beginning, and we should welcome a good beginning,” he said. 

The secretary also praised the cooperation of Russia and the compliance of Syria in the process.
The two diplomats said they would push for a November start for a Geneva conference to reach a political settlement in Syria under the auspices of the United Nations.
In opening remarks to the leaders at the summit meeting, President Susilo Bambang Yudhoyono of Indonesia, the host nation, said the group was even more important today because its 21 member economies continued to “feel the pain” of the global economic crisis.
“In view of the difficult global economic situation these days, it becomes even more critical for all of us to work together in maintaining regional resilience,” he said.

“With this resilience, the APEC region will remain an important engine of global growth.”
Mr. Yudhoyono, citing International Monetary Fund data, said Sunday that the economies in the group would grow by 6.3 percent this year and 6.6 percent in 2014.
A report released Monday by the World Bank, however, said that developing economies in East Asia and the Pacific, some of which are members of the group, were expanding at a slower pace as China shifted from export-driven growth and focused on domestic demand. 

According to the report, the growth forecast for the region’s developing countries is 7.1 percent for this year and 7.2 percent for 2014, a slight downward projection from April.
Growth in larger middle-income countries, including Indonesia, Malaysia and Thailand, is also softening because of lower investment and global commodity prices, as well as lower-than-expected export growth, the report said. 

The only exception is the Philippines, where growth accelerated in 2013, said Bert Hofman, the World Bank’s chief economist for East Asia and the Pacific.
“It’s always a bit of a pity if you slow down, but we see a pickup next year on the premise that the global economy will do better,” Mr. Hofman said. 

“Seven percent growth for the whole region, excluding China, that’s a very decent growth rate. The East Asia and Pacific region still contributes a lot to world growth.”
One of the most important aspects of the summit meeting is the private discussions between leaders on the sidelines of the main gathering.
The Australian leader, Tony Abbott, met with Mr. Xi on Sunday night for the first time since becoming prime minister in September. 

On Monday, he said he hoped a free-trade agreement between Australia and China would be completed within 12 months.
Mr. Abbott said he planned to lead a large government and business delegation to China within the first six months of 2014, at the invitation of Mr. Xi. 

“The prosperity of every country in the region, including Australia, critically depends on trade and investment,” he said. 

“Our recent prosperity critically depends on the massive expansion of resource exports to countries in our region, particularly to China, and we want that to continue and not slow down.”
Mr. Abbott had planned to meet with Mr. Obama as well. 

The Australian leader said it was “a disappointment” that Mr. Obama had canceled his trip, but said it was understandable given the political deadlock in Washington. 

He said the president’s absence would not undermine the American “pivot” strategy in Asia.
“I fully understand the most constructive way America can engage with the world depends upon America being as strong as it can be at home,” Mr. Abbott said.

“I don’t think anyone here holds it against the president that he has very important business at home, and it is certainly in no way inconsistent with the pivot in Asia.”
Negotiations between China and Australia were described last week as “stalled” by the Australian minister for trade and investment, Andrew Robb.

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What If China Stops Buying U.S. Government Debt?

By Gordon G. Chang,

Just about everyone worries that Beijing, perturbed by the ongoing squabble in Washington, will sour on Treasuries. 

This concern is embedded in the provocative title of Eamonn Fingleton’s recent Forbes posting: “If Republicans Want to Shut Down Washington, They’ll Have to Ask China’s Permission First.”
The Republicans in fact did not seek Beijing’s approval, and neither did Democrats. 

Are both sides making a mistake by not taking into account China’s “feelings,” as the Communist Party demands everyone do?
It’s clear Chinese officials are watching closely. 

“The United States, the world’s sole superpower, has engaged in irresponsible spending for years,” observed Xinhua News Agency in an editorial on Wednesday. 

“With no political unity to redress its policy mistake, a dysfunctional Washington is now overspending the confidence in its leadership.”
The official organ’s warning, entitled “On Guard Against Spillover of Irresponsible U.S. Politics,” hints that Beijing leaders are thinking of further diversifying their portfolios away from dollar-denominated debt. 

If the Chinese don’t continue buying Treasury securities, the Federal government will have to find others to take up the slack.

Many, including the respected Congressional Research Service, argue that Treasury may then have to pay substantially more for borrowed funds and higher interests rates could result in lower long-term growth.
China is by far the largest foreign holder of U.S. Treasury securities. 

At the end of July, the last month for which official statistics are available, it had stockpiled $1.2773 trillion in Treasuries.

The country is way in front of second-place Japan, whose portfolio was $141.9 billion smaller. 

If you add in the Treasuries of autonomous Hong Kong, the hoard of the People’s Republic increases by $120.0 billion.
The direction is unmistakable. 

China, excluding Hong Kong, ended last century in December 2000 with just $60.3 billion in Treasury securities.
So, yes, it does look like Obama, Boehner, Pelosi, and Reid should have been on the line to Beijing before beginning their most recent spat. 

Yet historical data reveal a surprising trend. 

In July 2011, China set a record with its $1.3149 trillion of Treasuries. 

Then, over the course of the last two years, Beijing offloaded $37.6 billion of these instruments.
In short, the Chinese have not in fact been funding the Federal deficit since the middle of 2011. 

And during that period, the Federal government was able to continue operating, global markets did not panic, and rates on Treasuries declined. 

Significantly, China decreased its holdings at a time when the U.S. Treasury increased its borrowing from abroad, by $1.749 trillion in 2011 and by $821 billion last year.
All this is not to say the U.S. should run budget deficits—it definitely should not—but it does tell us that we do not need the Chinese to do so.
Of course, Washington’s statistics cannot capture China’s purchases of Treasuries through nominees. 

From time to time, there is unusual activity in foreign debt markets, notably London, indicating the Chinese are trying to hide purchases and sales. 

There is, however, nothing to suggest that, over time, their transactions behind the screen do not track the ones out in the open.
In any event, Beijing’s surreptitious transactions are not large enough to substantially disrupt or influence global markets. 

Even if all of China’s purchases of Treasuries over the last two years had been through nominees, it does not mean we relied on the Chinese. 

After all, the combined value of U.S. private and public debt securities dwarfs Beijing’s holdings. 

In 2011, the last year for which U.S. Treasury data is available, U.S. debt securities amounted to a staggering $33.7 trillion, 34.2% of the world’s total. 

In comparison, China’s foreign exchange reserves, which are thought to be mostly in Treasuries, totaled only $3.50 trillion at the end of this June.
And now we know what happens if China stops buying Treasuries. 

Nothing will happen. 

It has, in fact, already stopped adding to its stockpile.
But what happens if the Chinese really get mean? 

Every so often, Beijing’s civilian officials—and sometimes generals and admirals—publicly talk about dumping Treasuries to hurt the United States. 

These words, unlikely to be off-the-range comments in the Communist Party’s tightly run system, are meant to intimidate Washington at particularly sensitive times. 

China, however, has never implemented the “nuclear option,” the phrase heard in Beijing circles as early as August 2007.
Why hasn’t China “nuked” us? 

If Beijing sold Treasury securities in massive quantities, it would cause a panic, but the world’s deep markets would quickly adjust. 

The Chinese, we should remember, would get back dollars. 

Because they are doing this to undermine America, they would have to either buy hard assets or convert the proceeds into other currencies. 

As a practical matter, China’s deficit-plagued central government needs the income so most of the funds would go into interest-bearing instruments denominated in euros, pounds, francs, and yen.
The euro, pound, franc, and yen would obviously soar in value, so Brussels, London, Bern, and Tokyo would have to go out into the markets to rebalance their currencies. 

The only practical way to rebalance would be to buy... dollars.
So why don’t the Chinese go nuclear? 

They know that in a short period calm would return to the markets, America’s debt would end up held by its friends, and they would be stuck with a wide variety of assets their managers had shunned in the first place.

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Another Shutdown Victim: U.S. Efforts to Offset China

In the struggle for influence in the region, a dysfunctional Washington plays to the advantage of Beijing

By MARK LANDLER

President Obama canceled part of a visit to Asia, and may be forced to send Secretary of State John Kerry for the rest of it.

WASHINGTON — Debate over the federal government shutdown has tended to focus on those it hurts: veterans, tourists barred from the Lincoln Memorial and Yellowstone National Park, and giant-panda enthusiasts deprived of their publicly funded panda cam.
But the shutdown has already produced at least one winner: China.
By forcing President Obama to cancel a visit next week to Malaysia and the Philippines, the impasse with House Republicans is spoiling Mr. Obama’s show of support for two Southeast Asian countries that have long labored under the shadow of China. 

And it is undermining his broader effort to put Asia at the heart of American foreign policy.
Mr. Obama’s planned itinerary for next week — a mix of summit meetings and good-will visits — was carefully molded to reinforce the message to China that the United States is once again a central player in the region. 

But the president’s Asian pivot keeps getting pulled back by two forces that have haunted his presidency: strife in the Middle East and strife with Capitol Hill.
For now, the White House is clinging to the two remaining stops on Mr. Obama’s tour: a Pacific Rim economic summit meeting in Indonesia, at which he hopes to meet with President Vladimir V. Putin of Russia, and the East Asia Summit, in the sultanate of Brunei, where he is scheduled to meet the new prime minister of China, Li Keqiang.
With little sign of a compromise that would reopen the government by this weekend, however, Mr. Obama may be forced to scrap those visits, too, sending Secretary of State John Kerry as his understudy. 

It would be the third time he has been forced to sacrifice an Asia trip because of domestic issues — he postponed a visit in March 2010 because of the battle over the health care overhaul, and delayed it again four months later because of the oil spill in the Gulf of Mexico.
“Diplomatically, it’s very harmful,” said Kenneth G. Lieberthal, a top China adviser during the Clinton administration. 

“I’m sure there are some in China who say, insofar as the U.S. pivot has China as its bull’s-eye, this prevents them from hitting that bull’s-eye.”
Jeffrey A. Bader, who was Mr. Obama’s senior adviser on China until 2011, said the White House’s attempt to salvage the two meetings, even amid the chaos of the shutdown, was an important sign that it remained committed to the region. 

But he added, “The mayhem that compelled the decision sends an unfortunate signal to those countries that the U.S. is far away, and that the U.S. political system is dysfunctional.”
While Mr. Obama’s plans are in flux, President Xi Jinping of China has embarked on a tour of Southeast Asia that will take him to Indonesia and Malaysia.
China, with its expansionist impulses, is a clear beneficiary of a distracted United States. 

It has clashed with Malaysia and the Philippines over claims to rocky outposts in the South China Sea, which the three countries border. 

On previous visits, Mr. Obama said the United States wanted to resolve these disputes peacefully and keep sea lanes open.
The president has invested in the Philippines and Malaysia for different reasons.
The Philippines is a treaty ally of the United States, and the administration has tried to shore up its Asian alliances, in part as a counterweight to the muscular role of China.
Malaysia went through a strained period with the United States in the 1990s under a xenophobic leader, Mahathir Mohamad. 

But relations have thawed under a new leader, Najib Razak, and Malaysia is a member of the Trans-Pacific Partnership, a nascent regional trade bloc that is the economic pillar of Mr. Obama’s Asia strategy.
The administration wants to wrap up negotiations on a trade deal by the end of this year, a goal few analysts believe it can achieve. 

That may be even more elusive if Mr. Obama cannot personally offer his public backing at the Asia-Pacific Economic Cooperation forum, on the Indonesian island of Bali.
Critics have long charged that the “pivot” is more talk than reality — a fledgling trade deal and the deployment of 2,500 Marines to the Australian outback, rather than a genuine shift of resources. Administration officials say that contention is unfair, noting that in addition to the trade talks and alliance building, Mr. Obama spent hours one on one with Mr. Xi in Southern California in June.
Still, the turmoil in Syria has reinforced the reality that the Middle East is likely to remain a preoccupation for Mr. Obama. 

In his speech at the United Nations last week, he mentioned Asia in a single line, noting that it could serve as an economic example.
While the president may be no less committed to the region, there is a reduction of Asia expertise on his senior team. 

Mr. Kerry has made the Middle East, and particularly peace negotiations between Israel and the Palestinians, his top priority, in contrast to his predecessor, Hillary Rodham Clinton, whose first trip in the post was to Asia, and who led the drive to open diplomatic ties to Myanmar.
Susan E. Rice, the national security adviser, has by necessity focused less on Asia than her predecessor, Tom Donilon, while Treasury Secretary Jacob J. Lew has far less experience in the region than his predecessor, Timothy F. Geithner. 

Administration officials counter that Commerce Secretary Penny Pritzker and the United States trade representative, Michael B. Froman, are both heavily involved in Asia.
But among top officials, only Defense Secretary Chuck Hagel, whose history in Asia dates to his combat service in Vietnam, seems eager to put the rebalancing at the top of his agenda. 

Mr. Hagel, a former Republican senator, has been harshly critical of his fellow Republicans in the budget fight, telling reporters traveling with him to Japan and South Korea this week that “if this continues, we will have a country that is ungovernable.”
An ungovernable America is not something that the Chinese want either, given the economic interdependence of the two countries. 

But in the diplomatic struggle for influence in the region, a dysfunctional Washington plays to the short-term advantage of Beijing, especially with China having weathered its own domestic political upheavals.
“And,” added a senior administration official with bitter humor, “they still have a panda cam.”

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