Monday, August 22, 2011

China May Stop Buying U.S. Debt

China may ease up on buying Treasurys as U.S. growth slows and instead focus on developing internal demand, says Stephen Roach, the non-executive chairman of Morgan Stanley Asia.
China traditionally buys Treasurys to help finance the U.S. economy so Western consumers will buy goods made in China, but less demand here leaves the Asian giant little choice but to do what many say needs to be done anyway: export less and buy more at home.
"This is China's wakeup call," Roach tells CNBC.
China can "no longer afford to stay the course of export-led growth that is hooked on the bandwagon of the American consumer."
A Chinese shift away from U.S. Treasuries could mean Washington would have to pay higher interest rates to attract investors to U.S. debt and make up for any vacancies created by China.
By focusing heavily on exports, China was sitting on "trade surpluses, current account surpluses, and massive accumulations of foreign-exchange reserves, two-thirds of which have to be reinvested in dollar-based assets," Roach says.
But as China boosts internal consumption, domestic savings go down and so does its foreign-exchange accumulation, Roach says.
"And guess what ... they stop buying dollar-based assets, not because they're mad at us...but just because they don’t need to do it," he said.
China has expressed concern in the past over the level of debt the U.S. economy carries and what that means for its investment in U.S. Treasurys.
Vice President Joe Biden tells China's Caijing magazine the administration "is deeply committed to maintaining the fundamentals of the U.S. economy" so as to "ensure the safety, liquidity, and value of U.S. Treasury obligations for all of its investors," Bloomberg reports.

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