China, for Lack of Alternatives, Is Stuck Buying US Debt

Despite the end last week of the 16-day U.S. government shutdown and the extension of the debt ceiling until next year, there are few signs that the situation has reassured China, the largest holder of American debt.

With around $1.28 trillion in U.S. Treasury bonds already in its portfolio, China has little choice but to continue to buy U.S. debt, economists say. Government bonds from Japan and Europe are a less attractive investment, and finding other avenues to diversify the country’s huge foreign currency reserves would require major economic reforms and could result in unwanted volatility.

Yet the partisan infighting that brought the U.S. government within hours of a default is increasing domestic pressure on Beijing to reduce its exposure to America.

“The challenge for China is, if they don’t own U.S. Treasurys, what would they buy instead?” said William Adams, an international economist for PNC Financial Services Group. “There are not a lot more attractive options out there.”

China, with an economy still heavily dependent on exports, needs a robust American economy to continue to bolster its manufacturing sector, and that makes it unlikely that China will stop buying America’s debt in the near future, said Arthur Kroeber, managing director of GaveKal Dragonomics, a global economic research firm in Beijing.

That doesn’t mean, however, that China’s leadership isn’t worried that repeated fiscal crises – Washington must once again confront the issues that prompted the shutdown in just a little more than two months – could dampen America’s economic recovery and, in turn, hurt China.

“There clearly is a level of concern,” Kroeber said. “From a strategic standpoint, the Chinese realize they live in a world where the rules are set by the U.S. They resent that on the one hand, but on the other hand, they benefit from that a lot.”

That level of concern was expressed in China’s state-run media last week after the House of Representatives approved a budget and debt-ceiling deal that had been drafted in the Senate. An editorial in the People’s Daily, a newspaper considered the mouthpiece of the Chinese Communist Party, expressed resentment about the deal, which funded the government only until Jan. 15 and raised the debt limit only through Feb. 7, and the fact that there was little China could do to protect itself in the face of Washington chaos.

“China has every reason to feel anxious,” the editorial said. “It appears unfair that Beijing’s options to utilize its foreign reserves are basically in the control of Washington. It’s an arduous task for China to gradually turn around this situation.”

That concern built on a blistering editorial distributed Oct. 13 by the official Xinhua news agency that called for a “de-Americanized world.”

“Instead of honoring its duties as a responsible leading power, a self-serving Washington has abused its superpower status and introduced even more chaos into the world by shifting financial risks overseas, instigating regional tensions amid territorial disputes, and fighting unwarranted wars under the cover of outright lies,” the editorial said.

It continued: “Under what is known as the Pax-Americana, we fail to see a world where the United States is helping to defuse violence and conflicts, reduce poor and displaced population, and bring about real, lasting peace.”

Some analysts said the editorial served the purpose of bolstering China’s image as a reliable partner, in contrast to the United States, whose president, Barack Obama, was forced to cancel trips to summits in Indonesia and Brunei due to the shutdown.

But others said beyond image-making, it also expressed the views of top leaders.

“They started to really worry that the U.S. is weak,” said Shen Dingli, vice dean of international affairs at Shanghai’s Fudan University. “Not only that Obama is weak, but that the entire system is weak.”