China: Look Who's Snapping Up Tons Of T Bonds

Beijing's big stake could be cause for worry in Washington

The leaders of China's communist government have never been known as major players on the world financial stage. But with billions of dollars in trade surpluses to recycle, China's secretive monetary agencies are becoming big buyers in the U.S. Treasury markets--raising fears on Wall Street and among some U.S. trade experts about how Beijing will use its newfound clout.

In the first six months of 1996, China boosted its holdings of Treasury notes and bonds by $11.8 billion. That's a sharp turnaround from 1995, when China's trading netted only $700 million in medium- to long-term Treasuries. The heavy purchases made Beijing this year's third-largest buyer of such Treasuries, after Britain and Japan.

DOWNSIDE. The U.S. Treasury welcomes Beijing's heavy buying. "The more buyers we have, the lower the rates we have to pay," says Roger L. Anderson, the Treasury's chief bond salesman. But some Washington trade experts see a downside. Trade relations between the U.S. and China have been tense, and a long, tough negotiation over Beijing's membership in the World Trade Organization looms ahead. China could be positioning itself as a major lender to the Treasury, some experts argue, to boost its clout in the talks. "Just as Japan gained significant leverage over the U.S. [as a lender], China feels it can, too," argues Greg Mastel of the Economic Strategy Institute, a Washington think tank.

A close look at China's investing pattern makes that threat seem somewhat less worrisome. Beijing's $11.8 billion purchases in notes and bonds--securities with a maturity of two years or longer--was almost exactly matched by a $12 billion drop in its holdings of Treasury bills, which mature in 3, 6, or 12 months. "This is more of a portfolio adjustment than a big surge into the market," says Louis Crandall, chief economist of New York bond traders R.H. Wrightson & Associates. "They're moving to longer maturities." The shift, mainly into medium-term notes, doesn't necessarily give Beijing any extra influence.

China has plenty of reasons to move some of its nearly $100 billion in reserves into Treasuries. It needs liquid assets to join a network of Asian central banks pledging to help defend each other's currencies in future emerging-market crises, such as the one set off by Mexico's 1994 peso devaluation. It also needs to recycle accumulated dollars to prevent a damaging rise in its own currency, the renminbi, that could hurt China's exports. Beijing wants large dollar reserves as backup when it begins making the renminbi fully convertible in the next several years. And with interest rates in Japan near zero and the dollar rising against the yen, the U.S. offers a better bet for China's cash. "Even central banks can try to make a speculative gain on currency holdings," says Miron Mushkat, chief economist at Hong Kong-based Lehman Brothers Asia.

Longer term, China will have other uses for its cash. "When you look at what China needs, it's capital and technology--not a big overseas investment portfolio," says Joseph P. Quinlan, senior international economist at Dean Witter Reynolds Inc. For now, however, Beijing is joining an elite club--the foreign governments whose Treasury purchases together finance more than 90% of the U.S. budget deficit--as a rite of passage into global financial clout. Next: the gnomes of Beijing?

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