What next for ‘Chimerica’, as Niall Ferguson calls the unholy alliance of Chinese capital and US debt that has grown up over the last decade.
China is concerned about the erosion of value in US Treasuries and the dollar:
China should seek guarantees that its $682 billion holdings of U.S. government debt won’t be eroded by “reckless policies,” said Yu Yongding, a former adviser to the central bank.
The U.S. “should make the Chinese feel confident that the value of the assets at least will not be eroded in a significant way,” Yu, who now heads the World Economics and Politics Institute at the Chinese Academy of Social Sciences, said in response to e-mailed questions yesterday from Beijing. He declined to elaborate on the assurances needed by China, the biggest foreign holder of U.S. government debt.
But what can China do? John Higgins, senior economist at Capital Economics: ‘It’s self-defeating for China or others to offload Treasuries. if China dumped US Treasuries, it would push up yields, slow economic activity in the US, and slow demand for imports. Is that in China’s interests? No.’
On the other hand, this from Steve Barrow, currency strategist at Standard Bank:
‘The issue of declining appetite among foreign central banks for US Treasuries is not just about supply. It’s also a protectionist issue. For us to envisage a significant rise in the yield of US Treasuries and a fall in the dollar, it would have to be because of a rise in protectionist and isolationist tit-for-tat policies. But that’s the way the world is heading. You can see creeping protectionism all the time. And that could lead to emerging market central banks keeping more of their reserves locally, to defend their currency and support their economy.’
