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Center Warns of China`s Risky Purchase of US Bonds

Posted April. 07, 2009 08:50,   


The Washington-based think tank Center for American Progress says China, whose gigantic foreign exchange reserves has raised its global status, will implement policies to boost exports and weaken its yuan currency that will ruin both itself and the United States and China.

In a report, the center said China has reinvested 1.4 trillion dollars, or 70 percent of its foreign exchange reserves, into the U.S. Accordingly, China overtook Japan in September last year as America`s largest creditor.

Beijing, however, is in a dilemma over how to invest the surplus, with the most likely answer being buying U.S. Treasury bonds by intervening in the foreign exchange market, the center said.

China has three ways to spend its accumulating trade surplus: depositing the money in Chinese banks, buy foreign currencies except for dollars, or reinvest in the U.S. market.

Investing in Chinese banks is not seen as an option amid low interest rate and inflation. China is also shunning buying other foreign currencies since it will strengthen the yuan’s value and thus hurt China’s export competitiveness.

When U.S. Treasury Secretary Timothy Geithner said the Chinese government manipulated the foreign exchange rate in January, Chinese Prime Minister Wen Jiabao said, “We will determine whether to continue buying U.S. Treasury bonds after estimating the value of our investment.”

Nevertheless, investing in U.S. Treasury bonds is the sole viable option for the Chinese government.

China’s heavy investment in the bonds can heighten risk. Since 2000, Beijing has invested 474 billion dollars into nationalized U.S. mortgage loan providers such as Fannie Mae Freddie Mac and 439 billion dollars into Treasury bonds. The report also said investment in corporate stocks and bonds accounts for a mere five percent of Chinese investment in the United States.

China’s accumulation of U.S. debt is considered unsustainable since it will ultimately force a devaluation of the dollar against other currencies and a drop in the value of Chinese holdings.

The report criticized the Chinese government for hoarding dollars since Beijing can have a bigger say on the global stage by having more dollars.