HONG KONG — Reversing its role as the world’s fastest-growing buyer of U.S. 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 this 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. For the quarter, the reserves edged up $7.7 billion, compared to a record increase of $153.9 billion in the same quarter last year. The main effect of slower bond purchases may be to weaken Beijing’s influence in Washington, by lessening the reliance of the U.S. Treasury on Chinese central bank purchases at its government bond auctions. Chinese officials from Premier Wen Jiabao on down have expressed growing nervousness over the past two months about their country’s huge exposure to America’s financial well-being. Chinese reserves fell a record $32.6 billion in January and another $1.4 billion in February before rising $41.7 billion in March, according to figures that were released by the People’s Bank for the first time over the weekend. Resumed growth in China’s reserves during March suggests that confidence in the country may be reviving, and capital flight could be slowing. China has essentially 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. Asked about the balance of financial power between China and the United States, one of the Chinese government’s top monetary economists, Yu Yongding, replied that, “I think it’s mainly in favor of the United States.” He cited a famous saying attributed to John Maynard Keynes: “If you owe your bank manager a thousand pounds, you are at his mercy. If you owe him a million pounds, he is at your mercy.” Private investors from around the world, including the United States, have been buying more American bonds in search of a refuge from global financial troubles. This has made the Chinese government’s cash less necessary and kept interest rates low in the United States over the winter despite the Chinese pullback. There have also been some signs that Americans may consume less and save more money in response to hard economic times. This would further lessen the American dependence on Chinese savings. Mr. Wen voiced concern on March 13 about China’s dependence on the United States: “We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.” The main worry of Chinese officials has been that American efforts to fight the current economic downturn would result in inflation that would erode the value of American bonds, Chinese economists said in interviews in Beijing on Thursday and Friday. “They are quite nervous about the purchasing power of fixed-income assets,” said Yu Qiao, an economics professor at Tsinghua University. Economists said that there was no sign that the Chinese government has deliberately throttled back its purchases of overseas bonds to punish the United States for pursuing monetary and fiscal policies aimed at stimulating the American economy. Those policies may run a long-term risk of triggering inflation, but the same policies could also benefit China if they rekindle economic growth in the United States and thereby revive China’s faltering exports. The abrupt slowdown in China’s accumulation of foreign reserves instead seems to suggest that investors were sending very 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 . China’s reserves have soared in recent years as the People’s Bank bought dollars on a massive scale to prevent China’s currency from appreciating in value as money has poured into the country from trade surpluses and heavy foreign investment. But China’s trade surpluses have narrowed slightly as exports have fallen, while foreign investment has slowed as multinationals have conserved their cash. Jun Ma, a Deutsche Bank economist in Hong Kong, predicted that China’s foreign reserves would only rise $100 billion this year after climbing $417.8 billion last year. 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. Instead of the Chinese government sending money out of the country in the first quarter to buy foreign bonds, individuals and companies in China were sending money out of the country to buy many of the same bonds. “The outflow would mostly end up in the U.S. anyway,” even if the Chinese government is no longer controlling the destination of the money, said Michael Pettis, a finance professor at Peking University, in an interview on Thursday. Heavy purchases of Hong Kong dollars by mainland Chinese residents early this year also have the indirect effect of helping the United States to borrow money. The Hong Kong government pegs its currency to the American dollar and stepped up its purchases ofTreasury bonds this winter in response to strong demand for Hong Kong dollars. But China’s economy appears to be bouncing back from the global economic downturn faster than its trade partners’ economies. That could result in China pulling in more imports while exports recover less briskly. This would limit trade surpluses and leave the People’s Bank with less money to plow into foreign reserves.
Sunday, 12 April 2009
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