Unbreakable China?

August 1, 2005
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KALAMAZOO — If the Chinese government doesn’t break its promise to let the yuan float it’s not likely the U.S. Senate will vote on a bill that could have added a 27.5 percent tariff to goods imported here from that country.

Manufacturers should get some competitive relief from China’s decision to stop pegging its currency to the U.S. dollar, and American consumers should see smaller hikes in the price of Chinese goods than if the tariff bill had become law. But perhaps more important, China may continue to buy U.S. Treasury securities and help carry the nation’s growing debt load.

If the Chinese government had decided that not purchasing Treasury bills would serve as retaliation to a tariff, then interest rates could have climbed. 

“The government would have to entice other buyers to buy our government debt, and to do so, it would have to raise interest rates,” said George Erickcek, senior regional analyst with the W.E. Upjohn Institute for Employment Research.

If short-term rates rose enough, then damage might have been done to the lending and construction industries.

The Bureau of Public Debt, a division of the U.S. Treasury Department, reported China held $223.5 billion worth of U.S. securities at the end of March. Japan was the single largest foreign holder that month with $679 billion, while all foreign entities then owned 44 percent of the total U.S. public debt.

Erickcek said the U.S. needs foreign investors because this nation isn’t putting enough money away. He also noted that in the past foreigners weren’t buying our debt — they were purchasing our properties, and that said more about our future than it did about them.

In the 1980s, for instance, Japanese investors went on a wild U.S. buying spree. They even bought Rockefeller Center. Erickcek said all that direct foreign investment helped to strengthen the U.S. economy, especially the auto industry.

“The people in Battle Creek enjoy the fact that Denso is there. We can feel pretty positive about foreign investment that buys plants and equipment,” he said.

Automotive parts-maker Denso Manufacturing employs 2,500.

“But when they only invest in government securities I think we get a little nervous,” he added. “Because when they’re doing that, they’re not really giving a vote of confidence to our private sector.”

So China may be buying our debt to keep us buying more of their goods, which raises our debt level and their economic output. So maybe this is more about them than it is about us.

“If they were confident about our stock market, they would go into equities. If they were confident about our growing domestic market, they might directly invest in equipment and plants. If they’re not that confident, then maybe they’ll just go into government securities,” said Erickcek.

“If someone is not really sure what is going on, government securities are not a bad hedge.”

Chinese oil company Cnooc Ltd., though, tried to buy Unocal Corp. But Unocal accepted an offer from Chevron Corp., despite a higher bid from Cnooc. Unocal shareholders are set to vote on the takeover next week. Analysts felt the Cnooc buyout attempt, however, was more about filling China’s need for energy than the confidence it had in a U.S. company.

The U.S. national debt was $7.8 trillion in March, which is 65 percent of the nation’s Gross Domestic Product. The public owns $4.5 trillion worth of that debt with nearly $2 trillion in foreign hands.    

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