China backs Obama with debt holdings up to US$900.2 bil.
By Daniel Kruger, Bloomberg
June 22, 2010, 11:59 am TWN
A year after criticizing U.S. fiscal policy as "irresponsible," China's leaders are showing increasing confidence in U.S. President Barack Obama's leadership of the American economy.
China boosted holdings of Treasury notes and bonds by 2.6 percent to US$900.2 billion in March and April, after reducing its stake by 6.5 percent from November through February, the longest consecutive monthly declines in a decade, U.S. data released June 15 showed. The People's Bank of China said June 19 that it will relax its 23-month lock on the yuan.
U.S. Senator Charles Schumer and Congressional leaders say the new foreign-exchange policy doesn't go far enough to keep them from seeking laws to punish China for what they say are unfair trade practices. Regardless of the currency rate, China will continue to be a net buyer of U.S. debt, according to George Goncalves, head of interest-rate strategy at primary dealer Nomura Holdings Inc.
"It's just bad economics to pretend we can fix the lives of middle class American workers by getting the Chinese to revalue its currency vis-a-vis the dollar — it's a horrible misconception," Stephen Roach, chairman of Morgan Stanley Asia Ltd. said in a June 15 radio interview from Hong Kong with Tom Keene on Bloomberg Surveillance.
China's US$22.7 billion in Treasury purchases during March and April contributed to a US$205.2 billion increase in total foreign holdings. That was the biggest gain since US$211.3 billion in June and July of 2009.
Purchases in recent months have focused on longer-term debt, unlike in 2008, when most of the cash went into Treasury bills. China boosted its holdings by 18 percent in the 12 months through this April, with notes and bonds due in two years or more surging 46 percent.
By purchasing longer-term securities, China is helping keep U.S. borrowing costs near record lows, aiding companies and individuals as the U.S. economic recovery strengthens.
Long-term U.S. rates would be about a percentage point higher without foreign government and central bank buyers, according to studies done in 2006 and 2009 by Professors Francis and Veronica Warnock at the University of Virginia in Charlottesville, who researched the matter for the Federal Reserve.
Following the latest round of purchases, yields on 10-year Treasuries, the benchmark for everything from corporate bonds to mortgages, fell to 3.06 percent on May 25, the lowest since May 2009 and below the average 4.35 percent since the U.S. government began reporting foreign holdings of U.S. financial assets in March 2000. The 3.5 percent note due in May 2020 fell 17/32 to 101 26/32 Monday, pushing up the yield to 3.28 percent.