China Tempted Away From Treasuries
How much longer can the United States expect China to buy its debt? With yields headed toward zero, stocks and commodities become more alluring.
With U.S. Treasuries having been one of the best-performing assets throughout the global financial meltdown, China’s massive dollar reserves brought immense relief to Beijing this year. Still, faced with near zero Treasury yields and the twin temptations of cheap assets from other advanced industrial countries and depressed commodity prices, China has ample reason to resume diversifying its reserves away from the dollar.
Only last year, T-bills looked like a liability for China, when returns on the country’s trillion-dollar reserves were paltry compared with higher-yielding but riskier options like equities. Instead, they proved a safe haven. But Washington’s issuance of mountains of debt to bail out the U.S. economy will only make T-bills less rewarding, putting the dollar’s future strength in question. Various economists are saying it will be in China’s interest to diversify in the near future.
“At the moment the demand for Treasuries is very strong. I think that this will continue for some time but not indefinitely, so that it is important for the Chinese to begin to move toward other assets,” said Harvard economist Dale Jorgenson.
“At some point in the next six months, it will make sense to begin diversifying out of Treasuries and buying balanced shares [in] the global stock market,” remarked Kenneth Rogoff, former chief economist for the International Monetary Fund. China “has done very well to hold [Treasury bills] during the crisis. Going forward, though, China’s sovereign wealth fund is going to be in a premier position to get fantastic values on Western assets.”
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