Central bankers are always secretive about what they do with their reserves, and China’s are no different. They’ve been hinting for years that they were tired of the risks associated with having too much of their hard-earned cash sitting in U.S. debt markets. And now we know what they’re doing about it, at least in broad outline.
Standard Chartered Bank, an old-line colonial institution with long experience in Asia, has done some revealing calculations to get at the truth of the matter. First it reckoned up China’s inflow of new foreign reserves for the first four months of this year. Then it toted up what investors in China, Hong Kong, and London spent buying U.S. debt in the same period. (Hong Kong and London are the two most important money centers where China routes its reserves through private-sector banks.) Finally, it compared the net inflow of reserves to the purchases of American debt securities.
Here are the results Standard Chartered came up with:
- China added $196 billion in foreign cash to its reserves in the four months ending April 30.
- Of that, a mere 23.5 percent, or $46 billion, appears to have gone into dollar-denominated U.S. government debt. The rest went into non-dollar assets, primarily the euro, the bank says.
This seems to mark the start of a considerable shift in China’s strategy, assuming Standard Chartered’s experiment reflects Beijing’s emerging investment strategy. China now has slightly more than $3 trillion in foreign reserves, and the markets have long assumed that 60 percent to 70 percent have gone into the U.S. debt market.
We’re not talking about an overnight calamity of the kind conspiracy theorists are drawn to. China’s not pulling out of the American currency. The Treasury reported at the end of April that China’s holdings of U.S. government paper remain steady at about $1.5 trillion (which makes Beijing our largest creditor).
But we’re probably looking at the start of a significant change. If the U.S. share of China’s new reserves is going to drop from 60 percent or 70 percent to less than a quarter in a consistent pattern, over time the flow of Chinese funds into the American market will obviously slow.
The important implications are three. First, a cycle that has endured since the early Cold War years is being broken. Asia’s so-called economic miracle has been based on the less-than-miraculous (and less than wise) idea that the U.S. would buy Asian exports and Asia would lend Americans back the money to keep on buying. It has been a neat arrangement, but from Day One it couldn’t go on forever.
Second, what China appears to have been doing so far this year goes some way to explaining weakness in the U.S. dollar. In effect, it has been exporting to Americans and taking dollars in return—and then putting those funds into the euro. China may have qualms about the European debt crisis, but it is plainly more concerned with preserving another important export market.
Finally, the rally in U.S. bonds this year now seems a source of some comfort. Many analysts watching financial flows have warned that any Chinese withdrawal from the U.S. debt market would create a disastrous spike in American interest rates. It hasn’t happened. We don’t seem to be quite so dependent on China’s funding of our deficit as our conspiracy theorists say we are.