http://network.nationalpost.com/np/...-one-that-matters-in-terms-of-us-debt.aspxAll
you had to do was read the headlines to get a good picture of the tone of talks at the China-US Strategic Economic Dialogue held in Washington at the end of July.
“Cut budget, halt inflation, US told” and “China to voice concerns over asset safety at dialogue with US” summarized two stories run by Beijing’s government-owned China Daily. They serve as a stark reminder of the dramatic shift in power between the two countries during the past year or so.
Fed Chairman Ben Bernanke, Treasury Secretary Timothy Geithner, and White House economists Larry Summers and Christina Romer were among those experiencing the new reality of being grilled by their Chinese creditors. Having to explain and justify U.S. national economic policy to their Chinese counterparts is kind of like the due diligence meetings major debt issuers have with their lending groups on Wall Street.
“Like it or not, it is healthy that the U.S. government realizes it is now in the same position vis à vis China that large corporate debt issuers are with respect to institutional investors and rating agencies,” DBRS Canada said in a recent newsletter.
It is no surprise that China is now in the driver’s seat as the United States’ largest creditor, with almost $800-billion of U.S. Treasury debt in its portfolio. However, it is the rate of growth that comes as quite a shock. China’s U.S. Treasury holdings first passed those of Japan only a year ago. But just four years earlier, Japan’s U.S. Treasury investments were over three times China’s.
This has pushed discussion of long-term U.S. credit issues like health care and budgets to the forefront, while American officials are being forced to answer the tough questions. Chinese officials naturally want the U.S. government to cut its budget deficit in order to prevent inflation that would erode the value of China’s dollar-denominated assets.
If China changed its stance on holding U.S. Treasury debt, the impact on global credit markets would be enormous. But that is not likely to happen in the near future. The Chinese have a lot to lose as investors if U.S. Treasury debt were to lose its traditional attraction. China may be diversifying its holdings and decreasing its short-term U.S. debt holdings, but it is also expressing confidence in the U.S. by letting its long-term positions rise, DBRS noted.
“Given the lack of political will that has – until now – hindered the United States from taking long-term remedial action to tackle its fiscal challenges, American voters who are serious about addressing these issues will probably welcome having China actively looking over their leaders’ shoulders,” DBRS said.
In the long term, it is becoming more apparent that China’s opinion is the only one that matters in terms of the U.S. government’s creditworthiness.
you had to do was read the headlines to get a good picture of the tone of talks at the China-US Strategic Economic Dialogue held in Washington at the end of July.
“Cut budget, halt inflation, US told” and “China to voice concerns over asset safety at dialogue with US” summarized two stories run by Beijing’s government-owned China Daily. They serve as a stark reminder of the dramatic shift in power between the two countries during the past year or so.
Fed Chairman Ben Bernanke, Treasury Secretary Timothy Geithner, and White House economists Larry Summers and Christina Romer were among those experiencing the new reality of being grilled by their Chinese creditors. Having to explain and justify U.S. national economic policy to their Chinese counterparts is kind of like the due diligence meetings major debt issuers have with their lending groups on Wall Street. “Like it or not, it is healthy that the U.S. government realizes it is now in the same position vis à vis China that large corporate debt issuers are with respect to institutional investors and rating agencies,” DBRS Canada said in a recent newsletter.
It is no surprise that China is now in the driver’s seat as the United States’ largest creditor, with almost $800-billion of U.S. Treasury debt in its portfolio. However, it is the rate of growth that comes as quite a shock. China’s U.S. Treasury holdings first passed those of Japan only a year ago. But just four years earlier, Japan’s U.S. Treasury investments were over three times China’s.
This has pushed discussion of long-term U.S. credit issues like health care and budgets to the forefront, while American officials are being forced to answer the tough questions. Chinese officials naturally want the U.S. government to cut its budget deficit in order to prevent inflation that would erode the value of China’s dollar-denominated assets.
If China changed its stance on holding U.S. Treasury debt, the impact on global credit markets would be enormous. But that is not likely to happen in the near future. The Chinese have a lot to lose as investors if U.S. Treasury debt were to lose its traditional attraction. China may be diversifying its holdings and decreasing its short-term U.S. debt holdings, but it is also expressing confidence in the U.S. by letting its long-term positions rise, DBRS noted.
“Given the lack of political will that has – until now – hindered the United States from taking long-term remedial action to tackle its fiscal challenges, American voters who are serious about addressing these issues will probably welcome having China actively looking over their leaders’ shoulders,” DBRS said.
In the long term, it is becoming more apparent that China’s opinion is the only one that matters in terms of the U.S. government’s creditworthiness.
