China premier ‘worried’ about safety of holding US treasuries

Traders work on the floor of the New York Stock Exchange in New York, United States.

China, the US government’s largest creditor, is “worried” about its holdings of Treasuries and wants assurances that the investment is safe, Premier Wen Jiabao said.

US President Barack Obama is relying on China to sustain buying of Treasuries as his administration sells record amounts of debt to fund a US$787 billion economic-stimulus package. Chinese investors have lost money on the securities so far this year, after increasing their holdings 46 percent to $696 billion in 2008, according to Treasury Department data.

“China’s purchases of American debt have been one of the few bolts keeping the wheels on the global economy,” said Phil Deans, a professor of international affairs at Temple University in Tokyo. “If China stops buying where does Obama’s borrowing to fund his stimulus come from?”

Treasuries declined, causing the yield on the 10-year US note to rise 0.06 percent to 2.92 percent at 4:51 p.m. in Hong Kong, according to BGCantor Market Data. The securities handed investors a loss of 2.7 percent in yuan terms this year, according to Merrill Lynch & Co.’s US Treasury Master index. The dollar fell 0.2 percent to $1.2938 per euro.

“Of course we are concerned about the safety of our assets,” said Wen. “To be honest, I am a little bit worried.”

Risky alternatives

China should seek to “fend off risks” as it diversifies its $1.95 trillion in foreign-exchange reserves, Wen said. Yu Yongding, a former adviser to the central bank, said in an interview on February 10 that the nation should seek guarantees that its Treasury holdings would not be eroded by “reckless policies.”

Demand for the relative safety of Treasuries has been supported in the past two years as finance companies reported $1.2 trillion in credit losses. China boosted holdings of government debt as it lost more than $5 billion from investing $10.5 billion of its reserves in New York-based Blackstone Group LP, Morgan Stanley and TPG Inc. since mid-2007.

Currency market moves have been more favorable to holding US bonds this year. Chinese investors who bought Japanese government bonds would have lost 7.7 percent so far this year in yuan terms, compared with a 7.3 percent loss for holders of German bunds, according to the Merrill Lynch indexes.

Shooting itself

“China will not sell the US debt now as that will only drive down Treasury prices, hurting not only the US but also the value of its own investments,” said Shen Jianguang, a Hong Kong-based economist at China International Capital Corp., an investment bank partly owned by Morgan Stanley.

US Treasury Secretary Timothy Geithner will defend his spending plans at the Group of 20 meeting near London this weekend. French Finance Minister Christine Lagarde and Germany’s Peer Steinbrueck of Germany want the summit to focus on improving regulation and restraints on the finance industry.

The US trade deficit and the government’s “nearly unrestricted” borrowing led to excess liquidity worldwide and “sowed the seeds” of the financial crisis, the People’s Bank of China said in a report Friday. The dollar has dropped 17 percent against the yuan since China ended a fixed exchange rate in July 2005. It was little changed at 6.8384 yuan Friday.

Printing money

“China is worried that the US may solve its problems by printing money, which will stoke inflation,” said Zhao Qingming, a Beijing-based analyst at China Construction Bank Corp., the country’s second-biggest lender. “If the US can make sure this will not happen, then China will continue to invest.”

US Secretary of State Hillary Clinton urged China, while visiting Beijing on February 22, to continue buying US debt, which she called a “safe investment.” She did not press China on its foreign-exchange policy, backing away from January comments by Geithner that the Chinese government manipulates its currency to boost exports.

China would maintain its policy of seeking a stable yuan, even as gains against the euro and Asian currencies hurt the nation’s exporters, Premier Wen said.

While the yuan has weakened 0.2 percent against the dollar this year, there has been a “drastic depreciation” in the euro and Asian currencies that has put a lot of pressure on Chinese exporters, Wen said. The currency has gained 8.6 percent against the euro this year and 6 percent against the Philippine peso.

Stimulus plans

“Our goal is to maintain a basically stable yuan at a balanced and reasonable level,” Wen said on the final day of the meeting of the National People’s Congress. “At the end of the day, it is our own decision and other countries cannot press us to depreciate or appreciate our currency.”

Collapsing exports have dragged the economy to its weakest growth in seven years and eliminated the jobs of millions of migrant workers. Wen reaffirmed China’s target of an 8 percent expansion in 2009 as economies from the US to Japan contract, saying the goal is “difficult but possible” to achieve.

China can add “at any time” to 4 trillion yuan ($585 billion) of stimulus measures to revive the world’s third-biggest economy, Wen said. Gross domestic product expanded 6.8 percent in the fourth quarter, compared with 9 percent for all of last year and 13 percent for 2007.

“We have reserved adequate ammunition,” Wen said, adding that the fiscal deficit is under control and the debt level still safe. “At any time, we can introduce new stimulus.”

Delegates of China’s legislative advisory body suggested that the government diversify away from Treasuries into more risky assets. Jesse Wang, executive vice president of China Investment Corp., said on March 4 that the nation’s $200 billion sovereign wealth fund may invest in “undervalued” commodities.

The Reuters/Jefferies CRB Index that tracks 19 commodities dropped 55 percent from a record high of 473.97 reached in July. Oil prices fell 68 percent from July’s all-time peak of $147.27 a barrel.

Source: Bloomberg

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