US bonds remain a favored haven
Source: Agencies |
August 11, 2011, Thursday
|
Print Edition
Print Edition
CHINA and other governments have little choice but to keep buying US Treasury debt to store swelling foreign reserves even after Washington's credit rating was cut by Standard & Poor's.
Some governments, such as Germany and Australia, have stronger credit ratings than the US following Friday's downgrade from AAA to AA+. But they do not sell enough debt to absorb the mountains of cash that China, Japan and others stockpile. Shifting money to stocks might offer a better return but can be politically volatile and high-risk, as current market turmoil shows.
"The choices are very limited," said Jun Ma, Deutsche Bank's chief China economist. "Either some markets are too small or those markets are bigger risks than the US Treasury."
Governments from China to Switzerland to Mexico have poured billions of dollars from exports, oil sales and other sources into Treasury debt, boosting foreign ownership to US$4.5 trillion as of April.
Asian holdings, especially China's, soared over the past decade as trade boomed and central banks amassed reserves to cushion against shocks such as a repeat of the 1997 Asian financial crisis. Beijing has become Washington's biggest foreign creditor, with US$1.1 trillion in Treasury debt, having bought dollars to regulate the value of its own currency, the yuan.
The flood of cash has helped to finance US budget deficits but has fueled unease abroad about relying on a single asset and led to calls for central banks to shift money to other bonds or even into gold or commodities such as copper.
"I think we should greatly reduce our holdings of US bonds," Guan Jianzhong, chairman of Chinese rating agency Dagong, told the Chinese business newspaper 21st Century Business Herald this week.
Even before the latest US debt turmoil, Beijing said it planned to move more of its US$3.2 trillion of reserves into other assets to reduce reliance on Treasuries. The make-up of China's reserves is secret, but analysts believe it is about 60 percent dollar-denominated, with the rest mostly in euros and yen.
Zhou Xiaochuan, China's central bank governor, affirmed that strategy last week after US leaders agreed to raise Washington's borrowing limit. But he gave no indication the bank might speed up a process that analysts say is likely to take years.
Selling could backfire
He said: "China would continue to seek diversification in the management of reserve assets (and) strengthen risk management."
Beijing's Treasury holdings are so vast that selling more than a fraction abruptly could shake markets, affecting interest rates and the value of the dollar. That might backfire by hurting the American economy and ultimately demand for Chinese exports.
Other governments can find no comparable market large and stable enough to act as a low-risk haven in which to park reserves.
Philippine central bank deputy governor Diwa Guinigundo said: "It is still a safe investment. Remember it is still AA+. At the same time, the US dollar remains the international currency and dollar assets remain the most liquid."
South Korea expects no "sudden change" in its reserve management, according to a deputy finance minister, Choi Jong-ku. Seoul has the world's seventh-largest foreign reserves and US$32.5 billion of it in Treasury debt.
"There is no alternative," he said.
Dubious credibility
That was demonstrated on Monday as jittery traders in the US rushed to buy Treasuries, pushing up prices as stock markets plunged following the S&P downgrade that jolted the global financial system and added to fears of an economic slowdown.
Taiwan's central bank, which has US$153.4 billion in Treasuries, reacted skeptically to the downgrade, noting that securities given AAA ratings by S&P and other agencies turned out to be toxic and "caused substantial losses" as the 2008 global financial crisis unfolded.
"This shows their credibility is dubious," the bank said.
Government debt in euros is the second-biggest market and a possible alternative. But rising doubts about whether Spain, Italy and other European governments can repay bondholders might put off savers who want safety.
Some governments might put money into foreign stocks, which can offer a higher return than safe but low-yielding Treasuries.
Beijing has put several hundred billion dollars into a sovereign wealth fund, but it sticks to small stakes in companies to avoid arousing political tensions in economies where Chinese investment can be sensitive. The added spending needed to absorb more of Beijing's money would require buying larger stakes that might trigger a backlash.
Japan, the second-biggest foreign owner of Treasuries, is also constrained by a need to show solidarity with Washington, its main military ally, analysts say. More than 90 percent of its US$1.1 trillion in reserves is believed to be in dollars.
Japan had US$912.4 billion in Treasury debt at the end of May, according to US government data, but the Finance Ministry says that includes private sector holdings. The ministry does not disclose details of its holdings.
Yuji Shimanaka, chief economist at Mitsubishi UFJ Morgan Stanley Securities, said: "Japan will continue to buy US Treasuries. This is about the US-Japan alliance. This simply cannot be changed."
Some Chinese commentators have also suggested Beijing might move money into gold or commodities such as copper that its economy needs. But such options can absorb only a fraction of China's reserves, which rose by more than US$950 billion over the year ending in June. Beijing has piled up the money because it buys most dollars that enter China in order to restrain the rise of the yuan.
Deutsche Bank's Ma said China and others can shift money into other assets but it would have to be gradual, "over years or decades."
Some governments, such as Germany and Australia, have stronger credit ratings than the US following Friday's downgrade from AAA to AA+. But they do not sell enough debt to absorb the mountains of cash that China, Japan and others stockpile. Shifting money to stocks might offer a better return but can be politically volatile and high-risk, as current market turmoil shows.
"The choices are very limited," said Jun Ma, Deutsche Bank's chief China economist. "Either some markets are too small or those markets are bigger risks than the US Treasury."
Governments from China to Switzerland to Mexico have poured billions of dollars from exports, oil sales and other sources into Treasury debt, boosting foreign ownership to US$4.5 trillion as of April.
Asian holdings, especially China's, soared over the past decade as trade boomed and central banks amassed reserves to cushion against shocks such as a repeat of the 1997 Asian financial crisis. Beijing has become Washington's biggest foreign creditor, with US$1.1 trillion in Treasury debt, having bought dollars to regulate the value of its own currency, the yuan.
The flood of cash has helped to finance US budget deficits but has fueled unease abroad about relying on a single asset and led to calls for central banks to shift money to other bonds or even into gold or commodities such as copper.
"I think we should greatly reduce our holdings of US bonds," Guan Jianzhong, chairman of Chinese rating agency Dagong, told the Chinese business newspaper 21st Century Business Herald this week.
Even before the latest US debt turmoil, Beijing said it planned to move more of its US$3.2 trillion of reserves into other assets to reduce reliance on Treasuries. The make-up of China's reserves is secret, but analysts believe it is about 60 percent dollar-denominated, with the rest mostly in euros and yen.
Zhou Xiaochuan, China's central bank governor, affirmed that strategy last week after US leaders agreed to raise Washington's borrowing limit. But he gave no indication the bank might speed up a process that analysts say is likely to take years.
Selling could backfire
He said: "China would continue to seek diversification in the management of reserve assets (and) strengthen risk management."
Beijing's Treasury holdings are so vast that selling more than a fraction abruptly could shake markets, affecting interest rates and the value of the dollar. That might backfire by hurting the American economy and ultimately demand for Chinese exports.
Other governments can find no comparable market large and stable enough to act as a low-risk haven in which to park reserves.
Philippine central bank deputy governor Diwa Guinigundo said: "It is still a safe investment. Remember it is still AA+. At the same time, the US dollar remains the international currency and dollar assets remain the most liquid."
South Korea expects no "sudden change" in its reserve management, according to a deputy finance minister, Choi Jong-ku. Seoul has the world's seventh-largest foreign reserves and US$32.5 billion of it in Treasury debt.
"There is no alternative," he said.
Dubious credibility
That was demonstrated on Monday as jittery traders in the US rushed to buy Treasuries, pushing up prices as stock markets plunged following the S&P downgrade that jolted the global financial system and added to fears of an economic slowdown.
Taiwan's central bank, which has US$153.4 billion in Treasuries, reacted skeptically to the downgrade, noting that securities given AAA ratings by S&P and other agencies turned out to be toxic and "caused substantial losses" as the 2008 global financial crisis unfolded.
"This shows their credibility is dubious," the bank said.
Government debt in euros is the second-biggest market and a possible alternative. But rising doubts about whether Spain, Italy and other European governments can repay bondholders might put off savers who want safety.
Some governments might put money into foreign stocks, which can offer a higher return than safe but low-yielding Treasuries.
Beijing has put several hundred billion dollars into a sovereign wealth fund, but it sticks to small stakes in companies to avoid arousing political tensions in economies where Chinese investment can be sensitive. The added spending needed to absorb more of Beijing's money would require buying larger stakes that might trigger a backlash.
Japan, the second-biggest foreign owner of Treasuries, is also constrained by a need to show solidarity with Washington, its main military ally, analysts say. More than 90 percent of its US$1.1 trillion in reserves is believed to be in dollars.
Japan had US$912.4 billion in Treasury debt at the end of May, according to US government data, but the Finance Ministry says that includes private sector holdings. The ministry does not disclose details of its holdings.
Yuji Shimanaka, chief economist at Mitsubishi UFJ Morgan Stanley Securities, said: "Japan will continue to buy US Treasuries. This is about the US-Japan alliance. This simply cannot be changed."
Some Chinese commentators have also suggested Beijing might move money into gold or commodities such as copper that its economy needs. But such options can absorb only a fraction of China's reserves, which rose by more than US$950 billion over the year ending in June. Beijing has piled up the money because it buys most dollars that enter China in order to restrain the rise of the yuan.
Deutsche Bank's Ma said China and others can shift money into other assets but it would have to be gradual, "over years or decades."
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