We’ve mentioned earlier that it was inevitable that China would reduce its purchases of Treasuries, independent of its desire to diversify away from them. With trade falling (although China still has a high surplus) and hot money inflows reversing direction, China has less reason to buy foreign assets.
From the New York Times:
Reversing its role as the world’s fastest-growing buyer of United States Treasuries and other foreign bonds, the Chinese government actually sold bonds heavily in January and February before resuming purchases in March, according to data released during the weekend by China’s central bank.
China’s foreign reserves grew in the first quarter of this year at the slowest pace in nearly eight years, edging up $7.7 billion, compared with a record increase of $153.9 billion in the same quarter last year.
China has lent vast sums to the United States — roughly two-thirds of the central bank’s $1.95 trillion in foreign reserves are believed to be in American securities. But the Chinese government now finances a dwindling percentage of new American mortgages and government borrowing.
In the last two months, Premier Wen Jiabao and other Chinese officials have expressed growing nervousness about their country’s huge exposure to America’s financial well-being.
Chinese reserves fell a record $32.6 billion in January and $1.4 billion more in February before rising $41.7 billion in March, according to figures released by the People’s Bank over the weekend. A resumption of growth in China’s reserves in March suggests, however, that confidence in that country may be reviving, and capital flight could be slowing.
The main effect of slower bond purchases may be a weakening of Beijing’s influence in Washington as the Treasury becomes less reliant on purchases by the Chinese central bank….
There have also been some signs that Americans may consume less and save more money in response to hard economic times. This would further decrease the American dependence on Chinese savings.
Yves here. That is more than a tad misleading. All signs are that consumer savings are debt reduction (the official reports of “savings” merely measures income versus consumption and does not differentiate whether the difference is debt paydown or an increase in liquid assets that could be used for investments such as Treasuries). The picture is further muddied by the clampdown on consumer credit. Money mavens for the masses such as Suze Orman, who formerly advised paying down on credit card debt as quickly as possible, now are telling consumers to build up an 8 month cash reserve and make only minimum card payments, since card companies are often cutting credit lines and not extending new credit. Thus families can no longer rely on credit cards as a source of emergency money and need to look to their own resources. Back to the story:
The abrupt slowdown in China’s accumulation of foreign reserves instead seems to suggest that investors were sending large sums of money out of mainland China early this year in response to worries about the country’s economic future and possibly its social stability in the face of rising unemployment.
Evidence of such capital flight included a flood of cash into the Hong Kong dollar. Mainland tourists were even buying gold and diamonds during Chinese new year holidays here in late January….
Some economists contend that slower growth in Chinese foreign currency reserves is not important to the economic health of the United States, even though it may be politically important. In the first quarter, instead of the Chinese government sending money out of the country to buy foreign bonds, Chinese individuals and companies were buying many of the same bonds.
“The outflow would mostly end up in the U.S. anyway,” even if China is no longer controlling the destination of the money, said Michael Pettis, a finance professor at Peking University, in an interview on Thursday..
Pettis is a China maven, so I am sticking my neck out in questioning him, but I see no reason to assume that Chinese retail investors would have a strong preference for the US. First, they have to see the same risk of currency depreciation that worries the officialdom. Second, Chinese are famous punters, so I could easily see their speculative tendencies leading them to play multiple markets, and not simply funnel funds to the US. The Japanese, who have historically been far less venturesome, in very short order had a large cohort of retail currency speculators, who in aggregate moved far more money that US hedgies playing the carry trade, and they often were in minor currencies (New Zealand dollar, Turkish lira). If Japan, why not China?