China backs Obama with debt holdings to $900 bn

A year after criticising US fiscal policy as “irresponsible,” China’s leaders are showing increasing confidence in President Barack Obama’s leadership of the American economy.

China boosted holdings of Treasury notes and bonds by 2.6 per cent to $900.2 billion in March and April, after reducing its stake by 6.5 per cent from November through February, the longest consecutive monthly declines in a decade, US data released June 15 showed. The People’s Bank of China said June 19 that it will relax its 23-month lock on the yuan.

United States Senator Charles Schumer and Congressional leaders say the new foreign-exchange policy doesn’t go far enough to keep them from seeking laws to punish China for what they say are unfair trade practices. Regardless of the currency rate, China will continue to be a net buyer of US debt, according to George Goncalves, head of interest-rate strategy at primary dealer Nomura Holdings Inc.

“It’s just bad economics to pretend we can fix the lives of middle class American workers by getting the Chinese to revalue its currency vis-a-vis the dollar — it’s a horrible misconception,” Stephen Roach, chairman of Morgan Stanley Asia said in a June 15 radio interview from Hong Kong with Tom Keene on Bloomberg Surveillance.

China’s $22.7 billion in Treasury purchases during March and April contributed to a $205.2 billion increase in total foreign holdings. That was the biggest gain since $211.3 billion in June and July of 2009.

Purchases in recent months have focused on longer-term debt, unlike in 2008, when most of the cash went into Treasury bills. China boosted its holdings by 18 per cent in the 12 months through this April, with notes and bonds due in two years or more surging 46 per cent.

By purchasing longer-term securities, China is helping keep US borrowing costs near record lows, aiding companies and individuals as the US economic recovery strengthens.