Why China’s stack of US bonds means less than you think
T-bills aren’t America’s underbelly yet.
There is a widespread belief that the US must kowtow to China these days because there is one else who can finance America’s ballooning government debt. Post the global financial crisis, China is T-Rex – King of the US Treasury bill.
The statistical story of who bought and who dumped US assets during the financial crisis tells a more nuanced story.
Basically, though China did level off its purchases of Treasury bills in late 2008 and early 2009, it didn’t matter. Why? Because pretty much every other government in the world concluded that US government debt was the safest haven at a time of financial storm.
Further, I would argue China doesn’t seem to have made much of concerted effort to buy up US government debt in a strategic manner. If anything, among the BRIC countries, it has been pretty conservative in its purchases of Treasury bills. The amounts are large because its reserves are big, but nothing extraordinary as a percentage of its total foreign assets. (I take India out of this equation because the composition of its foreign exchange reserves is somewhat opaque and, anyway, over half is kept in deposits with other central banks rather than securities. See
Foreign ownership of US Treasury bills actually peaked in the 1970s and 80s, when it touched about 40 % of the US government’s debt portfolio. Far from falling because of Lehman Brothers et al, it surges by about a third because of the crisis – but still far below the figure of the 1970s and 80s.
Why does it surge? Not because of China which pulls back from buying T-bills from late 2008 and early 2009 as the crisis comes to a head. Mind you, it doesn’t stop buying, it just levels off its holdings of T-bills.
This is not out of keeping with overall Chinese foreign asset holdings.
T-bills have generally been about a third of its foreign assets for the past five years or so. That percentage falls by just a few percentage points.
And there was no question of this roiling the markets. Because there is a veritable stampede towards T-bills by the rest of the world. The CFR charts show that Russia, for example, dropped everything for T-bills. Brazil moved away from dollar assets, but returned after several months but this time also went only for T-bills. Even India bought a few more T-bills than normal, though from a small base.
Paul Krugman and others have long argued that this supposed China hold over the US was a load of bovine excreta. If China dumped T-bills, he has argued, the dollar would weaken – and help US export more, and China would see a huge drop in the value of its remaining and enormous dollar assets. I would take it a step further. I suspect there would be enough buyers of T-bills in the Rest of the World that the US government wouldn’t have too much trouble financing its debt, even at present rates of interest. China is big, but it’s not that big. There are plenty of other countries who run large current account surpluses who also need to do something with their piles of dollars – most notably energy exporters like Saudi Arabia and export-driven economies like Germany and Japan. And they seemed to have bought up T-bills faster than China could slow down its own buys.
What is striking is that what got dumped were bonds issued by US government-sponsored enterprises, so-called agencies. These include government-backed mortgage-doling firms like Fannie Mae and Freddie Mac.
They were treated like lepers by everyone. Beijing also dumped them, though at a more cautious pace than other countries.
So why does everyone go on about the T-bill connection? In large part this is about perception. I’ve heard so many US officials say about China, “We have to be careful with them, they are our bankers.” The evidence is that they are, but so are plenty of other governments. China has also occasionally reminded the US who owns whose debt. But, in real terms and in the present time, the truth is the US doesn’t really have all that much to worry. Let the US follow the Greek path of fiscal rectitude and over a few decades we could seriously be talking about the decade that China Bought America. But not yet.