Tuesday, March 17, 2009

China's concerns over U.S. Treasuries

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Last week, Chinese Premier Mr. Wen expressed concerns over the huge amount of money lent to U.S. in the form of U.S. Treasuries and the safety of the said assets.
China has already lost billions in their risky holdings of Fannie Mae, Freddie Mac, Morgan Stanley. In fact, the largest foreign investor (bonds) from the twin housing companies was China, but now reduced their debt from these sources.
It would be natural to think about the safety of your money, given the current conditions in the U.S. and world over and also their unfruitful experience in the holdings of the above institutions.
In order to quickly douse the fire over these concerns, the U.S. through a spokesman and through the president's chief economic adviser, insisted that U.S. Investments were the safest.
There is not much Mr. Wen can do in this regard. China cannot just withdraw the hundreds of billions of dollars of U.S. treasuries, as this may have a ripple effect and the world-over, a dislike of U.S. Investments may crop up. This would drive down the dollar, increase the interest rates - increased interest rates would most probably mean a worse recession. Driving down the dollar would reduce the value of the present $1.946 trillion foreign reserves with China, and also reduce the exchange rate for exported goods. Such actions would not be in China's best interest and not certainly in any other country's as well.
Over and apart from all this, Mr. Wen is going to introduce a stimulus package in China, and maintain an 8% growth rate. The Chinese Premier has to justify these actions to his own countrymen and also to the world for financial stability. The decisions he is going to make will be crucial.

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