Recently, Chinese Premier Wen Jiabao expressed his concern over the security of American bonds that China holds. However, only 10 days later, during a press conference on March 23, the Chinese Central Bank Deputy Governor Hu Xiaolian announced that China will continue buying U.S. Treasury bonds as an important investment of China’s foreign exchange reserves.
According to the U.S. Treasury Department, the United States experienced a record high net capital outflow of US$148.9 billion in January. However, China increased its U.S. treasury purchases by $12.2 billion in January reaching $739.6 billion, nearly a quarter of the total. In addition to Fannie Mae and Freddie Mac stock, as well as other U.S. government bills and bonds, China surpassed Japan, becoming the largest owner, holding more than $1 trillion.
Observers believe, while other countries are reducing their holdings of U.S. interests, Beijing’s move is based on a political motive.
When Hu announced the decision on Monday, he also emphasized the significance of the first meeting between regime leader Hu Jintao and U.S. President B. Obama scheduled on April 2 during the G-20 London Summit.
Editor-in-chief of Chinese Global Finance magazine holds a negative view about the regime’s move. He said, “The whole world is worried about how the United States is going to control and reduce its deficit in the future, in order to prevent the price landslide of its treasury bonds. Mainstream Chinese scholars believe China will definitely suffer losses in this investment, currently, it is a question of how to minimize the loss.”
The Fed announced on March 18, it would spend US$300 billion to purchase government bonds, and an additional purchase of $750 billion in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac. The move triggered a strong response from China, because it believes this is a signal that the U.S. has started printing money, which will result in a drop in the value of its U.S. bond holdings.
According to Chinese foreign reserve exports, between the end of 2006 to mid-year 2008, China lost over US$80 billion in its foreign reserve investment.
China’s foreign reserve was reduced US$30 billion in January, this is the first time in the past several years this has happened. Some experts believe this indicates a capital outflow from China. Besides, China’s accumulation of foreign reserves has fallen as the result of the slow down of its economy and exports.