U.S. bondholders in China still waiting for a deal

Rob Schmitz Jul 25, 2011
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U.S. bondholders in China still waiting for a deal

Rob Schmitz Jul 25, 2011
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Stacey Vanek-Smith: One of the most interested parties in this debt ceiling debacle is China. It’s the largest owner of U.S. debt, behind our own Federal Reserve. Secretary of State Hillary Clinton is in Hong Kong today offering reassurances. Our China bureau chief Rob Schmitz is on the line with us live from Shanghai. Good morning, Rob.

Rob Schmitz: Good morning, Stacey.

Vanek-Smith: So why is Hillary Clinton reassuring global investors about the debt talks?

Schmitz: Well, China owns nearly $1.2 trillion of U.S. debt, and I think it helps to explain it this way: Every single dollar of that is a measure of confidence in the U.S. economy. If the U.S. can’t pay that back, that’s a big loss of confidence from its biggest lender. Ever since the financial crisis, China’s been talking about diversifying its debt portfolio, and Secretary Clinton knows this. So if China starts to sell off that U.S. debt in favor of, say, more European debt or debt from other countries, that could damage the U.S. economy.

Vanek-Smith: Are the Chinese worried about what’s going on in Washington right now?

Schmitz:Well, for one thing, China’s not scared about the U.S. just going belly up. It’s not like there’s $14 trillion out there that’s due tomorrow. So the holders of this debt, if August 2nd we don’t have a deal, it’s not like there will be people sitting there who suddenly don’t have $14 trillion they expected to have. But, secondly, and maybe more importantly, economists I’ve talked to say China’s actually not that scared, and here’s why: China’s holdings of U.S. debt are mainly through its central bank. It’s not a case of a bunch of private banks holding the debt, which would be a bigger problem because private banks simply aren’t as big as China’s central bank.

I talked to Arthur Kroeber today. He’s an economist in Beijing. He says China’s central bank has much more financial cushion.

Arthur Kroeber: So they can sit around and wait for some kind of resolution to come through. In the worst case, the government might have to put some money into the central bank.

In other words, if China’s central bank has a problem and they need more money, they can just print it — as long as they’re confident they’ll be paid back someday, it’s not a big deal. If you’re a private bank, you obviously can’t print money.

Vanek-Smith: Our very own China bureau chief Rob Schmitz. Thanks Rob.

Schmitz:Thanks, Stacey.

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