Will the Economic Stimulus Package Reduce China's Purchases of U.S. Debt?
Thursday April 16, 2009
Chinese Premier Wen Jiabao (Credit: Liu Jin/Getty Images
China has been hinting they won't purchase any more U.S. debt. Won't the Economic Stimulus Package create more debt? What is the impact?China is now the largest holder of U.S. Treasuries, surpassing Japan in September 2008. As of February 2009, China owned $744 billion in U.S. Treasury bills, bonds and notes. This is 24% of the total of $3.1 trillion held by foreigners, and is up from $618 billion in September 2008,when the financial crisis began. The FY 2009 budget, which includes the Economic Stimulus Package, will increase the $11.7 trillion debt by a $1.7 trillion. Despite this looming debt, foreign demand for U.S. Treasuries remains strong.
What It Means for You
China and most other foreign nations have continued to increase their holdings of U.S. debt through January and February, even though they knew about the stimulus package and its impact on debt. U.S. Treasuries will remain a relatively safe investment as long as the global recession continues. China especially needs to buy Treasuries 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.However, the more debt China buys, the more leverage it has. This will continue to increase as the U.S. debt level increases.
Comments
It is a comment at this time not a statement. The meaning is “don’t think I am not watching and oh by the way don’t assume I will keep buying..”.
The Congress has buried its head so deep in Pelosi sand that they themselves don’t know what they are doing. And Obama’s lack of experience is showing through clearly. Fortunately,he can get away with not saying anything specific to the American people who cannot do much except call the representatives. Unfortunately, Chinese CAN do something and they (not threatening) are stating a case for a currency that is devoid of such unilateral approach.
I think if the spending (and hence the weak dollar policy) remains unabated, I would watch for China to make a symbolic gesture which would amount to a threat.
what Madwesh is saying is true. Consider the efects of a policy whose succes depends in issuing more debt, for how long can that policy sustain itself? some where along the line China will cash in on those securities and where will the US get the money to pay? they’ll have to mortgage off Social Security of future generations or sell of the great American Infrastructure. China even called for the replaced of the US$ as the global currency due to its loss in purchasing power. as of April 17 2009 the US$1= 8.99ZAR relative to US$1=10ZAR a month ago!!
China does control its banking instituions and mortgage houses unlike the US. Maybe Nancy Pelosi and Obama are blind to the bible adage ‘the borrower is servant to the lender’