Monday, April 13, 2009

China purchases of our debt dropping 

I'm intrigued by this item from the NYT today:
Reversing its role as the world�s fastest-growing buyer of United States 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 during the 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, edging up $7.7 billion, compared with a record increase of $153.9 billion in the same quarter last year. ...

Chinese reserves fell a record $32.6 billion in January and $1.4 billion more in February before rising $41.7 billion in March, according to figures released by the People�s Bank over the weekend. A resumption of growth in China�s reserves in March suggests, however, that confidence in that country may be reviving, and capital flight could be slowing.
If you asked me what caused that, I would put it to differences in trade. Remember that a trade surplus with Country X means Country X will buy your assets (I suppose they could hold your cash, but that earns zero interest -- less, in real terms if there's inflation.) A massive slowdown of the U.S. economy in the first quarter would show up in trade volumes between the two countries, and the Chinese report they exported 17.5% less to the U.S. in January year-over-year, and the U.S. Census has reported a similarly steep drop for February. Brad Setser wraps all of this together.
China�s trade surplus was larger in the first quarter of 2009 than in the first quarter of 2008 ($62 billion v $41 billion). [This largely due to lower cost of imported oil and energy, he notes. --kb] The global shock has gotten rid of many of the world�s macroeconomic imbalances. American households are saving more and importing less, so the US deficit is down. The oil exporters are no longer running a surplus. Even Japan�s surplus has come down, as demand for Japan�s exports has fallen more rapidly than Japan�s commodity import bill. China�s surplus though has continued to rise.
He thinks China went into recession in Q4 2008. If so -- and I just don't know enough about China to judge that -- the Chinese would be pleased by the US stimulus package providing a locomotive to their economy, which will keep their demand for US Treasuries up. I expect it's got nothing to do with Chinese reluctance to purchase our bonds, just that they had less dollar reserves to invest.

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