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Kimberly Amadeo

Is China Threatening to Sell U.S. Treasuries?

By March 16, 2009

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Chinese Premier Wen Jiabao
Chinese Premier Wen Jiabao (Credit: Liu Jin/Getty Images
A reader asks:
Would you explain to readers why Chinese Premier Wen Jiabao might be concerned about China's investments in the USA, and why he needn't be.
Last week, Premier Wen said "We have lent a huge amount of money to the U.S., so of course we are concerned about the safety of our assets." China is now the largest holder of U.S. Treasuries, surpassing Japan in September 2008. As of December, China owned $696 billion in U.S. Treasury bills, bonds and notes. This is 22% of the total of $3.1 trillion held by foreigners.

What It Means for You

China is not really worried about its investments in the U.S., as it knows the American economy is basically sound. However, China lost a lot of money it invested in Fannie Mae and Freddie Mac.

China has no serious intention of selling Treasuries, which it needs to keep the value of the dollar high, and keep the value of its currency, the yuan, low. A low yuan means Chinese exports and labor costs are relatively cheap. The U.S. has been pressuring China to raise the value of the yuan to improve the competitiveness of American companies.

Premier Wen's comments are in advance of the G-20 finance ministers' meeting this weekend. Next month's G-20 summit will be the first time that President Obama and Chinese President Hu Jintao will meet. One of Obama's intentions is to pressure China to raise the value of the yuan. Premier Wen's comments are simply a reminder that China has leverage. This will only increase in 2009, as the U.S. needs China to buy more of the Treasuries needed to fund the Economic Stimulus Package. (Source: WSJ, U.S. Insists China's Fears Over It Debt Is Unfounded, March 16, 2009)

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Comments

March 21, 2009 at 1:08 am
(1) mjB says:

Hyperinflation and the crash of the Keynesian model could be in the offing soon if the Chinese drastically draw down.

http://tinyurl.com/da295v

mB

July 12, 2013 at 12:51 pm
(2) Haresh Patel says:

I don’t think an increased Yuan value will increase the competitiveness of the American manufacturers in general, or though there may be few special cases. In fact the reverse can happen because China imports a lot of material to process and convert it to finished goods. It will be able to buy material cheaper and it can adjust its labor rates (which are relatively negligible) to compensate for the higher Yuan. China’s bigger concerns may be the depreciation of their dollar deposits and possibly some migration of manufacturing to other low wage Asian countries. An increased Yuan will cause a much bigger trade deficit because after all we will not be able to manufacture things like clothes and shoes and a lot of other consumer goods because of our much higher labor costs. If we want to import, we should pay the lowest price.

July 12, 2013 at 4:24 pm
(3) useconomy says:

Hi Haresh,

You raise some good points. First, so many Chinese exports to the U.S. are made by U.S. companies that are manufacturing in China. I agree that China is more concerned about its dollar holdings, and so will want to keep the dollar strong relative to the yuan. This is why I don’t think that China really means it when it says it will sell Treasuries. It has not real motive to do so.

Kimberly

September 8, 2013 at 1:39 pm
(4) Grant says:

You’re so cool! I don’t believe I’ve read through anything like this before.
So wonderful to discover another person with some genuine thoughts on this subject matter.

Really.. thanks for starting this up. This site is one thing that’s
needed on the web, someone with some originality!

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