China moving from highest indebted country(US) to second highest(Japan) to diversify holdings
It seems there aren’t many options for Chinese policy makers to park their trillions of dollars of assets. China has said it’s seeking to diversify its $2.5 trillion in foreign reserves, and the U.S. debt crisis gives it even more incentive to do so. In May, the latest month for which data were available, China’s Treasury holdings rose $7.3 billion to a whopping $1.160 trillion.
Where else could China park its funds, if it lost its appetite for Treasurys? Commodities are pricey and volatile, and Europe is still sorting out its own sovereign-debt fiasco.
The Japanese government bond market presents a stable — albeit low-yielding — investment opportunity right here in Asia. More than 95% of JGBs are held by domestic investors, so the risk of default is relatively low, no matter what the ratings agencies do.
China bought ¥2.3 trillion worth of JGBs in the first half of 2010 — six times as much as it had bought in the last five years combined — and then another net ¥583 billion in July. It sold most of those holdings last August, but what if it started buying JGBs again?
That would only add to market perceptions that the yen is going higher, fueling even more gains.
On Wednesday, Bank of Japan policy board member Hidetoshi Kamezaki told a news conference that he’s worried a rising yen could hurt companies and sentiment. But he said the central bank has no plans to further ease policy, even as it keeps a wary eye on the U.S. debt-talk progress.
“A default or downgrade on U.S. debt would cause considerable problems for Japan’s financial system,” Kamezaki said, according to Reuters. “As the world’s biggest economy, the U.S. would have an immeasurable impact on global financial markets and Japan would not escape the damage.”
In the past, China has sometimes managed to get its way with Washington. In 2008, for instance, Beijing reportedly pressured the then-Treasury secretary Henry Paulson to make sure Freddie Mac and Fannie Mae bondholders — of which China was a major one — wouldn’t take a bath on the paper.
But in the current situation, China has far less leverage.
Part of the problem is that Chinese foreign-exchange reserves are so large that a major portion of its funds must be in Treasurys, which are one of the deepest and most liquid markets in the world.