Is China Threatening to Sell U.S. Treasuries?

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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