China’s Investment in the Ailing U.S.: Will Washington’s Big Creditor Turn Away?

The San Francisco Chronicle blog looks at the impact in China of the US takeover of mortgage giants Fannie Mae and Freddie Mac:

How will this move affect the United States’ major creditors like China?

A well-informed economist in China told Reuters that his country “has bought a lot of asset-backed securities, and there might be short-term improvement in price…” If the U.S. Treasury issues new debt to fund its Freddie-Fannie bailout scheme, “should China be a buyer or not?” Reuters asks. Its source noted: “For China, whether or not you buy the new Treasuries, there will be losses: if you buy them, you’re getting deeper in the hole; if you don’t buy, your existing holdings will lose value….”

Vice-Premier Wang Qishan, who oversees China’s economic and financial policies, has observed that, although the U.S. government’s effective “takeover of the mortgage lenders was a reminder of the investment risks China is taking” in the U.S., China “had little room to diversify its $1.8 trillion in currency reserves. Buying non-government dollar bonds would be even riskier, while the euro is expensive and yields in Japan are low.” Wang said: “If we don’t buy U.S. Treasuries and [asset-backed securities], what else we can buy?” He said. “China just has no way to avoid the risks. Whatever we do, we have to bear the losses.”

September 9, 2008 1:41 PM
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