Why do they love so much US bonds?

"The people have good reason to be worried: after all, foreign exchange reserves are derived from Chinese workers' sweat and blood. It would not be impossible to lose these assets, since the American government keeps printing dollar bills to cover its astronomical deficits." 
Why are the Chinese leaders so fascinated by the United States and the Americans. 
I remember reading about the extreme excitement of Mao Zedong before meeting Nixon in February 1972.
Today, it translates differently, the Chinese leadership buys US Bonds, but it seems to me the same fatal attraction. 
Tibetans have a similar attractions, but without anything to invest in Obamaland.



China's central bankers cannot just ignore the political side of their massive US debt holdings
Lanxin Xiang
March 12, 2010 
For the first time, China's central bank has had to defend its handling of the huge sum of US debt it holds. In a recent National People's Congress session, Yi Gang, director of the State Administration of Foreign Exchange (Safe), seemed rather uncomfortable when grilled about why more than 60 per cent of China's reserves are in US dollar assets that have exceedingly low returns. Yi refused to provide exact figures, asserting simply that the matter was a "pure market operation" and "it should not be politicised".
Using technicalities to cover up failures in policy decisions reflects an arrogant assumption by the People's Bank elite - Yi is a vice-governor of the bank - that foreign exchange management is too complicated a subject for ordinary citizens to understand.
But Yi can hardly get off the hook that way. What audience did he have in mind for his comments? He was apparently sending an official reassurance to the US Treasury that Beijing would never use the debt issue as a foreign-policy instrument. Even more importantly, it was aimed at placating domestic dissatisfaction with the central bank's unwise decisions to acquire, in a very short time span and with no transparency, a huge pile of dollars to the detriment of the Chinese economy.
This is the first time since 1948 - when the Kuomintang regime collapsed amid a hyperinflationary monetary policy - that the population has become concerned about the government's management of foreign exchange matters. The people have good reason to be worried: after all, foreign exchange reserves are derived from Chinese workers' sweat and blood. It would not be impossible to lose these assets, since the American government keeps printing dollar bills to cover its astronomical deficits.
Also widespread is speculation about whether Beijing's monetary elite have benefited from their extraordinary passion for dollar assets. In a country where kickbacks and other forms of official bribery are common practice, few believe the central banking system is immune from corruption. The central bank's claim that dollar assets remain the best investment choice is ill-received at home, since it defends the failed Washington Consensus and snubs the idea of "socialism with Chinese characteristics". The people seem to receive no tangible benefit when trade surpluses are used to finance another country's bad spending habits. Chinese central bankers are out of step with popular sentiment: the monetary policy group is the most westernised of intellectual cliques. Their academic background is uniformly rooted in textbooks on neoliberal economics, even among those trained at home.
Collectively, they are proud to be called the "Fifth Avenue" monetary elite, named after the first graduate school for monetary studies created by the People's Bank in the early 1980s. It is located in Wudaokou, literally "the entrance to Fifth Avenue", Beijing's financial district. Its textbooks are mainly American. Many of its graduates have been running the foreign exchange operations, including two of Yi's predecessors at Safe. This elite group claims to hate politics and to be uninterested in international political relations, truly believing market mechanisms can solve all problems.
During the Mao Zedong period, the People's Bank was no more than the government's cashier-in-chief. It had little experience in international finance and monetary politics.
China did not take part in the postwar international monetary system and had no operating knowledge of the rise and fall of the Bretton Woods system - the rules for commercial and financial relations among the world's major industrial states after the second world war. Naturally, the political economy of the US dollar and its role in international politics was never part of the Fifth Avenue curriculum.
Trained in the United States, Yi's neoliberal view is not surprising, but the call to depoliticise the US debt issue is misguided if not utterly naive: above all, because the American side never stops politicising this issue.
US President Barack Obama's chief economic adviser, Larry Summers, has described the Sino-US debt relationship as a "financial balance of terror". The US Treasury never leaves politics out of policy considerations. The Chinese central bankers may have read John Maynard Keynes' The General Theory of Employment, Interest and Money, but they never understood Keynes the man. Throughout his professional career, Keynes fought many battles over monetary politics, both on the domestic and international stages.
If Yi and his colleagues were to read a major biography of Keynes, they might regret their public blurt about "depolitising". It will not be taken seriously at the politics-conscious US Treasury and will further alienate popular sentiments at home.
Beijing has to be cautious with the debt issue, for it must maintain a balance between its ties with Washington and the defence of its core interests. Yi's statement has not helped Beijing's cause. Instead, it may come back to haunt the central bankers if things go wrong with US assets in the near future.
Lanxin Xiang is professor of international history and politics at the University of Geneva.

China may be hiding US Treasury bonds

"Some say the massive holdings by China have implications for US national security, making it harder for Washington to carry out policies in conflict with Beijing".
It is one of the reasons why the Dalai Lama has to leave the White House through the kitchen door. 
The Chinese are backing their future.



China may be hiding US Treasury bonds: experts
P. PARAMESWARAN
The Sydney Morning Post
February 26, 2010
China, a top owner of US government debt, appears to be secretly buying bonds via third locations to hide its importance as a major creditor to Washington, experts told a congressional forum.
They said China-linked entities may be scooping up US bonds in London, Hong Kong or other locations, pointing out that official data almost certainly understates Beijing's US government debt holdings.
Some say the massive holdings by China have implications for US national security, making it harder for Washington to carry out policies in conflict with Beijing.
The latest figures by the Treasury Department this month showed a drop in China's Treasury bond holdings by 34.2 billion US dollars or 4.3 percent to 755.4 billion US dollars in December, the biggest decline in about a decade.
Simon Johnson, a former IMF chief economist, suggested that China could be behind the big jump in Britain's holdings of US debt to 300 billion US dollars in 2009 from 130.9 billion US dollars a year earlier.
He said he was baffled by the figure as Britain had run a substantial current account deficit last year.
"A great deal of this increase may be due to China placing offshore US dollars in London-based banks -- Chinese, UK, or even US -- which then buy US securities," Johnson told a hearing of the US-China Economic and Security Review Commission, which monitors for Congress the security implications of US-China trade and economic relations.
China may also be purchasing US securities through routes other than Britain, said Johnson, who is now a professor of economics at the Massachusetts Institute of Technology.
"The US Treasury data almost certainly understate Chinese holdings of our government debt because they do not reveal the ultimate country of ownership when instruments are held through an intermediary in another jurisdiction," he said.
Johnson said "a reasonable working assumption" showed that China owns close to one trillion US dollars of US Treasury securities -- nearly half of the stock of treasuries in the hands of "foreign official" owners, which was 2.374 trillion US dollars at the end of 2009.
"It is all but certain that some purchases made by agents in Britain and Hong Kong were on behalf of SAFE" or the State Administration of Foreign Exchange, the secretive Chinese state agency that buys foreign bonds, said Derek Scissors, an Asia economic policy expert at the Washington-based Heritage Foundation.
He said the more than doubling of Treasury bond purchases by Britain and Hong Kong "makes sense" for China as it had to park its huge chest of foreign exchange reserves.
"These cannot be spent at home and are too large to put anywhere other than the United States. No other country has financial markets capable of absorbing them," Scissors said.
"To hide the unavoidable extent of China's exposure to low-yield American bonds and try to avoid domestic flak, SAFE is routing money through third countries," he said.
China accumulated 453 billion US dollars in additional foreign exchange reserves in 2009, bringing the total reserves to a record 2.399 trillion US dollars at the end of December, latest Chinese government figures showed.
Many analysts argue that any threat by China to shift a large portion of its reserves out of US government paper is just bluster as such a move would impose huge costs on China itself.
But Eswar Prasad, who once headed the IMF's China division, said it was a "reasonably credible threat as the short-term costs to the Chinese of such an action are not likely to be large."
Any dumping of Treasury bonds could lead to a sharp fall in bond prices and the value of the greenback, incurring massive capital losses on the Asian giant owning the large bond holdings.
"But the US leaves itself vulnerable as China might well view these costs as worth bearing in order to preserve its national sovereignty or if trade and other economic disputes with the US came to a head," said Prasad, a professor of trade policy at Cornell University.
Republican congressman Frank Wolf told the panel that the situation is bad for US security.
"China is among our biggest 'bankers,'" he said.
"The implications of US debt to China are many and wide-ranging, encompassing everything from our national security to our ability to advocate for repressed and persecuted people."
© 2010 AFP