The sheer size of US indebtedness to China periodically causes heartburn among economists and politicians who worry that heavy levels of US debt will not only drive down the value of the dollar, but will put the US economy at risk of foreign manipulation. China’s central bankers are trying to put these restless minds at ease by declaring that the country has no intention other than seeking a stable return on its investments.
When China’s State Administration of Foreign Exchange, called SAFE, adjusts its portfolio of foreign reserves it does so to benefit China and the countries in which it invests, according to SAFE. The agency says that it is a long-term investor that “doesn’t seek the power to control recipients of its investment.”
SAFE also indicated that it has no plans to dump its current investments to buy more gold. China does not care for the small size of the gold market nor does it like the volatility of the shiny metal. In any event, buying more gold will not help much in diversifying the country’s assets. If China doubled its gold holdings the total investment would still amount to just one or two per cent of SAFE’s portfolio.
What the Chinese say and what they do are not always a good match. When the government announced last month that it would allow the currency to appreciate, markets reacted positively to the news. A few days later, when it became clear that this appreciation would be essentially identical to the appreciation of 2005, enthusiasm for China’s move waned.
In the case of its foreign reserves, though, China and SAFE have been quite consistent over the past half-dozen years. The investments in US debt have played a significant role in the growth of China’s domestic economy. Without a US market for all its manufactured goods, China would have been in a terrible fix.
That US consumers were borrowing from China to pay for all those goods didn’t seem to matter to the US government at the time, and now it’s too late to worry about the size of the debt.
What the US can do, however, is develop a plan for reducing that debt. For the Chinese, that plan would include maintaining the dollar’s stability, reaching a resolution to the US’s fiscal deficit problems, and finding a way to exit gracefully from the stimulus spending that is nearing its end. When you think about it, that’s pretty much what thinking Americans would like to see as well.
Paul Ausick
Top Gaining Stocks
Top Losing Stocks