Commentary Magazine


Will China Buy American Debt?

Will Beijing buy more American debt?  Yesterday, Wen Jiabao arrogantly said that President Obama will want to know the answer to this question.  Then the Chinese premier announced this:  “Whether we will buy more U.S. Treasury bonds, and if so by how much-we should take that decision in accordance with China’s own need and also our aim to keep the security of our foreign reserves and the value of them.”

Premier Wen wants Obama to call, but the American leader doesn’t have to.  We already know how the Chinese are going to make their decision regarding purchases of American debt.  There are two parts to the Chinese premier’s answer.  The first is “China’s own need.”  Up until the global crisis, 38 percent of the Chinese economy related to export sales.  In 2007, the last year for which figures are available, all but $5.9 billion of China’s overall trade surplus or $262.2 billion related to sales to the United States.  So China is forced, as a practical matter, to recycle its export earnings into dollar-denominated assets if it wants to keep selling into the American market.

The second part of Premier Wen’s answer is “keep the security of our foreign reserves and the value of them.”  Beijing is sitting on top of substantial unrealized losses on its purchases of American equities, and it would also have had unrealized losses on its purchases of non-Treasury debt had the Bush administration not rescued Fannie Mae and Freddie Mac.  So, to avoid even more losses, the Chinese appear to be restricting their purchases of American debt to the safest instruments around, obligations of the U.S. Treasury.

As American consumers buy less and save more-imports fell a record amount in November and registered a large fall in the last quarter of last year-China will have fewer dollars to invest in Treasuries.  Chinese purchases of American debt will drop accordingly.  Premier Wen is trying to cloak Beijing’s investment of its dwindling export earnings in mystery, but the basic economics is easy to understand.  So, Mr. President, don’t call Mr. Wen and make concessions in the hope he’ll buy more debt.  Just pull out your calculator.  After you make a few assumptions about trade, you will be able to estimate how much the Chinese will buy this year.

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