please download here: ChinaDaily_2010.5.27.pdf
In books related to modern finance, US Treasuries (UST) have been considered as the safest investment and T-bill rates have been widely accepted as a benchmark for risk-free rates by the market. However, their risk-free status is being questioned because of the falling greenback, an increasing trade deficit and also because of the mounting Federal budget deficit after 2000. During the aftermath of the financial tsunami, China continued to purchase UST securities to help stabilize the global financial system. Starting last October, China began to moderately decrease her UST holdings from $938 billion to $877 billion in February. However, a very recent report indicates that in March, for the first time in six months, China resumed accumulation of sizable holdings – an additional $17.7 billion worth of UST.
The UST holdings scale-back that started in October was probably due to the low yield of the UST and the risk of greenback devaluation. The Obama visit in November has improved the Sino-American relationship but not the US financial and economical structure. The United States has been disturbed by the financial crises and the Federal government has to sell more UST to finance its $1.6 trillion 2010 budget deficit. As the Federal Government fiscal year ended in September, the UST auctions in the autumn are essential and an attractive greenback is the key.
Interestingly, the US dollar began to strengthen after November. The US Dollar Index, which measures the dollar against a basket of currencies with the euro weighted around 56-57 on November 25 to rocket to 87.068 on May 18. As the Greece sovereign debt crises worsened, the second most widely-used currency lost 18 percent of its value against the USD. As a result, the crises have successfully drawn liquidity assets to the safe haven of the dollar. The total amount of UST held by foreign countries increased from $3.67 trillion in November to $3.88 trillion in March. The pain and suffering of the Eurozone turned out to be to the gain of the Americans.
If one carefully dissects the constituents of the US GDP, it is clear that none of the components has the capability to generate steady and sustainable growth. The 9.9 percent unemployment rate in April is considered structural, strongly suggesting that it will take time for a booming economy to absorb the existing labor force. Alongside the choppy housing sector, US consumer spending will not be sufficient to drive GDP strongly enough to replicate the pre-2008 era.
According to Obama’s fiscal 2011 budget, the US government will be running a deficit of around 10.3 percent of its GDP in 2010. More importantly, the 10 year plan proposed by the Obama government will generate cumulative deficits of $10 trillion by 2020. At the projected rates of increase, the size of the debts will equal 90 percent of the projected GDP of 2020. The federal government is doing its utmost in hopes of confirming and applying the theory of John Maynard Keynes on government spending. Although a lot of corporations have improved their balance sheets, small and medium companies are still struggling to get affordable financing, while domestic private investment is not robust enough to enhance the GDP.
The White House will need stronger net export figures in the next 12 months to improve employment and boost the economy in order to deliver Americans the “change” promised. Currently, the US heavily relies on export commodities and technology related products. A weak dollar would help to boost export of traditional goods and save jobs in manufacturing sectors such as steel and the automobile industry. Therefore, the dollar is likely to remain stable or even depreciate or be devalued when the panic selling related to the recent financial turmoil subsides.
For years, there have been questions about China’s approach of accumulating depreciating USD denominated assets to finance the squandering US consumers. When the rest of the world is jostling for greenbacks, it may be the right time to cash out and decrease our Treasury holdings and to diversify the existing foreign reserve portfolio.