by Laura Conaway

Over the months at Planet Money, we've talked about the role China has played in fueling the consumption boom in the United States. China has been a key investor in the U.S. economy, holding something like $1 trillion in American debt. More recently, economists have worried that China would redirect its considerable financial might inward, choosing to boost its own slowing economy directly rather than help fund President-elect Barack Obama's stimulus plan. That stimulus plan depends on deficit spending, and that borrowed money has to come from somewhere.

This morning Win Thin, a currency analyst at Brown Brothers Harriman, presents a slightly different view. Thin sends the chart above, and writes: "China's purchases of US Treasury bonds may in fact be slowing. However, this is a much different story than recent media stories that suggest China may be shunning dollar instruments altogether. That is simply not true."

I'll drop the full, and somewhat technical, note after the jump.

 

Even if you're new economics, it's worth starting to read the hard stuff — you'll catch some of it now, and eventually you catch more. If you've got questions, hit the comments. I'll see what we can do.

Win Thin writes:

China foreign reserves rose to $1.946 trln in December vs. $1.906 trln at the end of September and $1.809 trln at the end of June. Pace of reserve accumulation fell off sharply in Q4, rising only $40 bln vs. $97 bln in Q3 and $127 bln in Q2. This was the smallest quarterly rise since Q2 04, but with the trade surplus rising in Q4, it appears that the drop off in reserve accumulation is due to easing inflows of hot money. This is not surprising given the heightened risk aversion seen since mid-2008, and suggests that China's purchases of US Treasury bonds may in fact be slowing. However, this is a much different story than recent media stories that suggest China may be shunning dollar instruments altogether. That is simply not true.

US TIC data for Nov is out on Friday, and while the data is a bit stale, we expect the report to show ongoing purchases of US Treasury bonds by China. Again, given the Q4 reserve data, China is likely to show a slower pace of US purchases, but data should not show any dumping of dollar assets. Despite all these scare stories heard this past year regarding China's appetite, China has been a net buyer of dollar assets every month since October 2007. And we'd also like to reiterate the important difference between stocks and flows. China has a stock of US dollar assets close to $2 trln. We believe that any diversification out of dollars would be in the monthly flows, as there has simply been no indication whatsoever that China is selling dollar assets out of its existing $2 trln stock. It is possible for China to diversify away from dollars but still be a net dollar buyer every month.