Is China Turning Bearish on the U.S. Treasury?
Is America鈥檚 banker turning bearish? This week, as the largest foreign holder of U.S. Treasury securities. This news comes one week after it was that China may sell-off some of its U.S. Treasury holdings to punish Washington for selling weapons to Taiwan. These developments offer more evidence that Beijing is growing less willing to continue buying and holding U.S. debt.
If China is indeed losing its taste for Treasuries, its timing could not have come at a worse time. The federal government has to finance over in deficit spending this fiscal year. And in the past, the U.S. has relied on China to buy not only Treasuries, but corporate and mortgage debt as well. Without China in the picture, it鈥檚 unclear where all this money will come from.
For years, concerns over the growing U.S. debt to China鈥攅stimated at $755 billion鈥攚ere met with calming explanations of the economic interdependence of the two superpowers. After all, the argument went, China wouldn鈥檛 ever sell off its U.S. paper because the two economies need each other so much.
While that symbiotic relationship remains, it might not be enough to persuade the Chinese to continue lending us billions of dollars annually. Decisions of foreign leaders aren鈥檛 driven by budget finances alone: continued arms sales to Taiwan, free-speech issues raised by Google and others, and unhappiness with currency valuations could all come into play. And the Chinese might decide that the benefits of a more diversified portfolio and protection against an inflated dollar might outweigh the costs of selling off T-bills.
In truth, no one knows exactly what to expect from China in the future. Its continued investment in the U.S. government isn鈥檛 an 鈥渆ither-or鈥� decision; there are about 800 billion different lending positions the Chinese could take. And no one really knows what would happen if China stopped buying Treasuries, although U.S. interest rates would almost certainly rise. This uncertainty is unsettling, and we don鈥檛 seem to have a plan B. It鈥檚 time to think hard about dealing with a world in which the Chinese aren鈥檛 the reliable lenders we鈥檝e come to rely upon so heavily.
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