China, the Biggest Financier of U.S. Debt, Expresses Concern about Payback
It's a question every lender must ask: Is the borrower good for the money? But the query can be especially nerve-rattling when it is asked of the United States by its biggest lender, China.
“We have lent a huge amount of money to the United States,” China's premier, Wen Jiabao, said at a news conference in Beijing today. “Of course we are concerned about the safety of our assets. To be honest, I am a little bit worried. I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.” Meanwhile, according to Bloomberg News, the People’s Bank of China said in a report that the U.S. trade deficit and the government’s “nearly unrestricted” borrowing led to excess liquidity worldwide and “sowed the seeds” of the financial crisis.
Wharton finance professor Richard J. Herring notes that such concerns "are usually expressed by mid-level bureaucrats." Wen's statement "raises the visibility enormously." While there could be many reasons for China to put such pressure on the U.S. — the two nations have had long-running disagreements on currency-related trade issues — Herring argues that there is good reason for China to be concerned.
"The U.S. Treasury bonds are not pristine; their credit default swaps [the cost of purchasing hedges against their default] are worse than many other countries' and even some corporations'," he says. China "may be well alarmed by what the Congress did — approving a $787 billion stimulus bill with 9,000 earmarks. It looked like Congress was paying no attention whatever to our future debt."
China holds the world's largest foreign-exchange reserves, reported at $1.946 trillion at the end of 2008. As much as two-thirds of that sum is believed to be held in U.S. dollar assets, primarily Treasury bonds.
But could Wen's public expression of concern be more about trade than faith? A recent Knowledge at Wharton article noted long-running complaints in the U.S. about China's manipulation of the value of its currency, the yuan. China's intervention is designed to keep the yuan low relative to the U.S. dollar, and there was a dust-up earlier this year when U.S. Treasury secretary Timothy Geithner criticized Chinese currency policy. "Chinese intervention in [foreign] exchange markets has the same effect on the relative price of Chinese and American goods as a tariff does," Wharton finance professor Richard Marston said in the article. "And this intervention has been huge. China has accumulated more than $2 trillion in foreign exchange reserves in part because the country has not allowed its currency to appreciate sufficiently."
After Geithner's statement, the U.S. government, mindful of its dependence on China to finance much of President Obama's stimulus plan, has backed off its currency complaints, and urged other nations to do the same. In February, Secretary of State Hillary Clinton traveled to Beijing and urged the Chinese to continue buying U.S. debt. “We are truly going to rise or fall together,” Clinton said. “By continuing to support American treasury instruments, the Chinese are recognizing that interconnection."