Political Risks

By the end of June 2002, the Chinese mainland held a foreign exchange reserve around US$242.76 billion and folk foreign exchange savings deposits over US$85.54 billion, most of which were put in the US markets of T-bond, institution bond and corporate bond. Fortunately, to avoid risks, such a huge investment was scattered on financial markets of the United States, Euro area and Japan instead of being put into one basket, with only one-fourth of the total used to buy 80.9 billion worth of US T-bonds.

Along with the development of the Chinese economy and foreign trade and increase in the inflow of capital, the reserve and deposits of foreign exchange would also increase, such a growth rate has been quickened especially in the process of a lowered exchange rate of the US dollar. The resultant question is that the inevitably larger scale of US T-bonds held by China means the involvement of higher political and sovereign risks.

The 56-page report on China's military strengths at present in the next 20 years, released by the Pentagon on July 12, repeated the same old tune about "China Threat", while the ensuing report published by the US-China Security Review Committee, established with the authorization of US Congress, bluntly asserted that China threatened the United States economically and in security.

The Cold War mentality of US right-wing forces is unfavorable to the healthy development of Sino-US relations. In case the two countries suddenly became foes due to the Taiwan question or other issues, China might face economic sanction and blockade imposed by the United States, then, the huge amount of US T-bond assets China holds may face the political risk of being frozen. The 80.9 billion US T-bond, likened to a piece of soft ribs, is equivalent to two-fifths of China's financial revenue in 2001, so China has to guard against this financial risk.
 

An Weapon

However, some persons, including US right-wingers, hold that China's possession of huge amounts of US T-bonds constitutes a potential threat to the US economy, for instance, it threatens the stability of the exchange rate of the US dollar and financial markets, just like the Soros- managed hedge fund, impcting the exchange rate of pound sterling, therefore US T-bond serves as a weapon for China.

It should be said that these worries and illusions are groundless. For example, Japan holds the world's most foreign exchange reserve, but still cannot influence the exchange rate of the US dollar and helplessly looked on the sharp fluctuations of the yen. Furthermore, China's investment in the US bond market, entirely different from that of the hedge fund, is steady, medium- and long-term investment. Why can't the United States accommodate China's high-credit investment if it can tolerate the existence and development of the hedge fund?
 

Olive Branch

In fact, China's purchase of US T-bonds serves as an olive branch of Sino-US relations, for it greatly supports US economic development, balance of international payments and stability of the exchange rate of the US dollar. As everybody knows, the United States is a country with an accumulation of huge fiscal deficits, its government bonds standing as high as US$3400 billion. China's purchase of US bonds has supported the latter's fiscal policy.

What's more, the United States has heavy current account deficit, which needs huge inflow of capital, including that from China, to balance its international payment. It is the inflow of China's foreign exchange that contributes to US exchange rate stability. In fact, during the devaluation of the US dollar, China still steadily purchased a certain amount of American T-bonds.

However, judged from an economic point of view, there is no permanent friend but eternal benefit. For China, purchasing the US T-bond is normal international investment conforming to the economic law, for no one would risk such a big deal without expected steady profits brought by the easy-trading T-bond. Nevertheless, it is an eternal principle to strengthen caution against political and sovereign risks involved in international financial investments.


By PD Online Staff Member Li Heng