Treasuries Lack Safety, Liquidity for China, Yu Yongding Says
“I do not think U.S. Treasuries are safe in the medium-and long-run,” Yu, a member of the state-backed Chinese Academy of Social Sciences, wrote yesterday in an e-mailed response to questions. China is unable to sell the securities in a “big way” and a “scary trajectory” of budget deficits and a growing supply of U.S. dollars put their value at risk, he said.
The State Administration of Foreign Exchange, which manages the nation’s reserves, said last month that U.S. government debt has the benefits of “relatively good” safety, liquidity, low trading costs and market capacity. China’s holdings of Treasuries, the largest outside of the U.S., totaled $867.7 billion at the end of May, down from $900.2 billion in April and a record $939.9 billion in July 2009.
To help cool demand for the securities, China needs to curb the growth of its foreign reserves by intervening less in the currency market, Yu said. The People’s Bank of China said June 19 it would let the yuan float with reference to a basket of currencies, ending a two-year-old dollar peg.
The yuan has since appreciated 0.8 percent to 6.773 per dollar and analysts surveyed by Bloomberg predict the currency will end the year at 6.67, based on the median estimate. China limits appreciation by buying dollars, fueling its demand for Treasuries.
“China has to depend more on demand and supply in the foreign exchange market for the determination of the yuan exchange rate,” Yu wrote. “Only God knows how much value that China has stored in the U.S. government securities will be left in the future when China needs to run down its reserves.”
The cost of pegging the Chinese currency to the dollar is “intolerably high” and threatens the welfare of Chinese people, Zhang Ming, deputy chief of the International Finance Research Office at the Chinese Academy of Social Sciences, wrote today on the website of China Finance 40 Forum.
“The U.S. government has strong incentives to reduce its real burden of debt through inflation and dollar devaluation,” he said. “Whichever way it is, the yuan-recorded market value of Treasuries will fall, causing huge capital losses to China’s central bank.”
The dollar has weakened against all 16 major currencies monitored by Bloomberg in the past month, sliding 5.4 percent versus the euro and 4.7 percent against the pound. The Dollar Index, which the ICE futures exchange uses to track the greenback against the currencies of six major U.S. trading partners, is headed for its lowest close since April 15.
Premier Wen Jiabao in March urged the U.S. to take “concrete steps” to reassure investors about the safety of dollar assets after President Barack Obama stepped up spending to help end a recession. The White House predicts the U.S. budget deficit will hit a record $1.47 trillion this year, about 10 percent of gross domestic product.
An “appropriate” policy for China would be to allocate its reserves with reference to the weightings of Special Drawing Rights, a unit of account of the International Monetary Fund, Yu said in May. China bought a net 735.2 billion yen ($8.3 billion) of Japanese bonds in May, doubling purchases for this year.