United States Creditors

Reading the article titled Debt Burden Now Rests More on U.S. Shoulders in the Jan. 22 edition of the New York Times, it states that China, while still the States' largest creditor, significantly decreased its investment in the U.S. China held $728 billion of Treasury securities at the end of 2008, and invested $62 billion through Nov. 2009, which accounts for less than five percent of the money borrowed this past year by the U.S. treasury. What is interesting is that in 2008, China bought 20.2 percent of the U.S. debt. However, in 2009, they were projected to invest only 4.6 percent in U.S. treasuries. Why is there such a large change in spending? Has China found an alternative investment option, or are they worried about the massive U.S. spending increases? ITG chief economist Robert Barbera says that China is focused on keeping their currency value low compared to the U.S. dollar, and they needed to buy fewer treasuries to do so. It is possible that is the case, but there could be more appealing options for the Chinese.


Dr. Tufte said...

-1 for not capitalizing Treasury (waived for Block 1).

I have a couple of thoughts.

1) You mix raw numbers and percentages. Is it possible that the raw number is similar to past years, although the percentage is lower because we're issuing more debt. (I know the answer, but this is something for you folks to explore.)

2) I think the analysis from the expert about exchange rate management is plausible.

3) Another possibility is that the Chinese held so much of our debt that they couldn't divest themselves without pushing prices down significantly. This certainly was the position they were in last spring (there is a post about this on SUU Macroblog).

Spencer said...

An earlier post on this blog cites an article that might be one possible and logical explanation for the decrease in Chinese investment in US Treasury securities. The post was "China's New Investment" from 4/15/2009. It notes that in the beginning of 2009 China was significantly increasing its domestic investments to provide some stimulus to a slightly lagging growth rate. I think that often when looking at numbers like these we cite a current concern as explanation for the last year's numbers and don't take into account that governments and government spending aren't things that react quickly and it could likely be that such investment is a response to a perceived problem from a year or even two years ago.

Whidbey said...

After doing some more research on the US Treasury website (http://www.ustreas.gov/tic/mfh.txt), I was able to get some clarification the China's debt ownership. In November of 2008, they owned $713 billion in US Treasuries, which accounted for 23.5% of the debt. In November 2009, they increased the amount of debt they owned to $789 billion. However, the percentage that they owned of the US Debt fell to 21.95%. The reason for that is because in that one-year span, the US issued over $500 billion in new debt. The Chinese still invested in the US at a similar rate, but the amount of US Debt issued outdistanced the previous year, thus giving the appearance that China bought less debt.