Analyzing China's Exposure To U.S. Debt

Stephen Green, head of research at Standard Chartered Bank in Shanghai, speaks with host Liane Hansen about how the global financial crisis has hit China. China has close to $1.3 trillion invested in U.S. debt with up to $500 billion in agency securities.

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LIANE HANSEN, host:

The $700 billion bailout package that President Bush signed on Friday was an effort to reassure investors around the world. One of those investors is China, which holds about one trillion dollars worth of U.S. debt. Joining us to talk about the effect on China's economy is Stephen Green. He's the head of research at Standard Chartered Bank in Shanghai. Welcome to the program.

Mr. STEPHEN GREEN (Head of Research, Standard Chartered Bank, Shanghai): Hi. Thank you.

HANSEN: Do you think China will buy up some of that $700 billion worth of debt?

Mr. GREEN: Well, China has the biggest FX reserves in the world at the moment, and something in the region of 60 to 70 percent of that is in dollar assets. So it's probably even more than a trillion dollars. We're probably looking at 1.3 trillion. At the moment, obviously, we don't know how much of that is in treasuries and how much of that is in agency debt and how much is in corporate bond, but we have a pretty good idea. And we reckon around $450 to $500 billion is in agency securities. And a couple of weeks ago, the U.S. government basically backstopped that guaranteed (unintelligible) - sovereign guarantee. So it's not - I imagine China at the moment is not so worried about that. It's not worried about its treasuries.

HANSEN: How much does the financial recovery here depend on China continuing to buy U.S. debt?

Mr. GREEN: Well, to a large degree. If we look at the data, obviously, it's not clear. We don't know exactly when China or other central banks are buying U.S. treasuries. But over the last six months, it's - we suspect that, really, central banks have been the key buyer of U.S. treasuries, and, of course, you know, private institutions, pension funds, and other asset managers have been less keen to buy U.S. debt.

Now, that's changed over the last few weeks because you've seen a sharp rise in risk aversion. People are fleeing emerging markets. They're fleeing commodities. They're exiting all kinds of risk, and when investors flee risk, the thing that they intend to buy into is U.S. treasuries. So there's been a lot more private demand for U.S. treasuries over the last few weeks.

Looking forward, I imagine China will keep buying. Obviously, the U.S. deficit, the U.S. federal deficit is going to get much, much larger thanks to all these bailouts. And that's - that would traditionally frighten people about taking - buying U.S. debts because they'd be afraid of dollar falling, dollar depreciation, and also inflation. But I imagine China needs to invest somewhere, and I think, at the moment, the U.S. market, despite all the risks, despite all the problems, still looks the best place to go.

HANSEN: Has the shutdown of the U.S. economy, the slowing, affected the Chinese economy?

Mr. GREEN: Clearly, it has. Exports from China to the U.S. are growing only by a few percentage points at the moment. And China has been used over the last three or four years, it's been used to its exports growing at 30, 40 percent. So that's clearly had an impact, and, of course, many export firms are experiencing much tougher times than any time in the last five years.

At the same time, though, Europe has been growing up until the last couple of months. Europe was pretty strong. And so Chinese exports to Europe have remained strong, and China has done a good job at diversifying away from just the U.S. as an export market. So it sells - about 15 percent of its stuff goes into the emerging world, other parts of Asia, Africa, and the Middle East.

The thing - the thing that really worries China is that not only, of course, do we looking at a U.S. recession now, but Europe looks like it's in recession as well now. And other parts of the emerging world are - emerging economies are slowing down sharply as well. So that's going to clearly impact upon Chinese exports, and China grew at around 12 percent in real terms last year. And export is probably accounted for around two to three percentage points of that growth. So China will slow as a result of the global slow down.

HANSEN: Stephen Green is head of research at Standard Chartered Bank in Shanghai. Thank you for your time.

Mr. GREEN: My pleasure.

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