Forbes – by Panos Mourdoukoutas
There is old news and new news about China’s affinity with US government debt.
The old news is that China’s Dagong Global Credit Rating cut its credit rating for US government debt by one notch to A-minus from A in the mid of last October, following an agreement reached by Congress to raise the government’s borrowing ceiling.
Obviously, as a large buyer of US debt, China has been concerned over the ability of America to pay back its debt. That raised fears among many China observers that the Chinese government was about to begin uploading its US bond holdings.
Did it happen? Not at all. On the contrary, China has been stepping up buying US government debt!
That’s the new news. According to a recent Wall Street Journal report, the Chinese government has increased and quickened the buying of US government securities – boosting its holdings of US Treasury debt by $107.21 billion in the first five months of 2014. That brings Chinese official holdings of US debt to $1.27 trillion, or 10.6 percent of the US Treasury market.
Coming in a period when the Federal Reserve has been tapering its own purchases of US government debt, the Chinese purchases offer an explanation of the continuing decline in US Treasury yields. At the same time, low yields help keep the US Treasury and equity markets in bubble territory, and the Chinese currency under pressure – a win-win situation for both sides of the Pacific.
“The country’s purchases have salutary effects on both sides of the Pacific,” writes Min Zeng, author of the report. On the Chinese side, the purchase of US Treasuries weakens China’s yuan against the dollar, helping Chinese exporters sell to US consumers. On the American side, the rising in the price of financial assets helps American consumers stay wealthy enough to keep on buying both domestic and Chinese goods.
ETFs Six-month performance ( percent)
iShares 20+ Year Treasury Bond (NYSE:TLT) +9.0
iShares Core Total Aggregate Bond (AGG) +2.0
Vanguard Total Market (BND) +1.8
Simply put, China sidesteps concerns over the impact of growing US debt on its export growth – a strategy that worked for Japan back in the 1980s, and works for China now.
www.forbes.com/sites/panosmourdoukoutas/2014/07/17/china-downgrades-us-debt-then-buys-it/
So the Slant eyes will buy just enough Treasuries to keep us picking Cotton for them…