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China Won’t Call-in US Debt

As of the end of June, China owned $900.2 billion in US Treasury bills. If you add in all of China’s dollar-denominated assets, the total investment by China in the US is about $2.5 trillion. The sheer size of US…

By Douglas A. McIntyre
Published July 7, 2010, 12:34pm ET · 2 min read

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As of the end of June, China owned $900.2 billion in US Treasury bills. If you add in all of China’s dollar-denominated assets, the total investment by China in the US is about $2.5 trillion.
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

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Douglas A. McIntyre

Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.

A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.

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