China's sale of U.S. debt: Safety valve or cause for concern?
Bloomberg News reports that China is selling billions of dollars of its massive inventory of U.S. Treasuries to raise dollars to buy back and stabilize the country's own currency. The move comes amid a sharp decline in Chinese stocks in recent months and rising concerns about China's slowing economic growth.
For years, China's appetite for Treasuries has helped the U.S. government cover its bills. Recently, for example, that helped fund the nearly $1 trillion recovery plan Congress implemented after the 2008 financial crisis. For its part, China uses that debt to anchor its own balance sheet and to insulate itself from global economic shocks.
Chinese demand for U.S. sovereign debt has only grown in recent years. In 2007, China held $388 billion in Treasuries, which at the time ranked the People's Republic behind Japan. But as of June, China's hoard of American debt had more than tripled to $1.271 trillion, according to the Congressional Research Service, the biggest position held by any nation and a substantial portion of the $6.175 trillion of Treasuries held overseas.
Some experts warn that the U.S. had become overly reliant on China as a lender of last resort via their huge purchases of Treasuries. Boosters of the relationship counter that having China invested so heavily in the U.S. helps assures global stability and economic cooperation.
Peter Kenny, chief market strategist for Clearpool Group, a trading software and execution firm, says reports of China selling U.S. debt are not a cause for concern, noting that Treasuries remain an "iconic pillar of stability" for the global financial system.
"This is why you hold Treasuries, so when you come to a patch like this you have access to liquidity without hurting your broader credit system," Kenny said in explaining why China may be liquidating some of U.S. debt holdings.
Still, concerns remain over what could happen if China and other emerging market economies, moving to strengthen their currencies, moved in concert to dump large amounts of Treasuries.
A 2008 Congressional Research Service analysis cited concern by some economist that "attempts by China to unload a large share of its holdings U.S. securities holdings could have a significant negative impact on the U.S. economy (at least in the short run)" and could precipitate "other foreign investors to sell off their U.S. holdings as well."
That could cause U.S. interest rates to spike and hurt economic growth.
The reported Chinese sell-off of Treasuries comes at a time when the American economy remains the brightest spot on the planet for global investors. U.S. gross domestic product grew 3.7 percent between April and June, well above an initial estimate of 2.3 percent, a sharp contrast with Europe's anemic recovery and stagnation in Latin America, as well as other emerging markets damaged by China's slowdown.
"We are not fortress America," said Farok Contractor, professor of management and global business at Rutgers University. "But the U.S. looks like the least bad place."