China loses patience with US leaders who 'kidnapped' world finance

  • @BawdenTom

China, the world's biggest owner of US Treasuries, turned up the pressure on the US to sort out its sovereign debt woes yesterday as its official news agency labelled American politicians "dangerously irresponsible" for failing to resolve the crisis.

As nervous investors dumped short-term Treasury bills, China's state-controlled Xinhua news agency said US politicians had "kidnapped" the rest of the world in a "game of chicken" by wrangling over a deal to raise America's $14.3 trillion (£8.7trn) debt ceiling.

The agency said in an editorial that many countries would be caught in the "impact zone" if politicians failed to agree a deal by Tuesday's deadline, with China set to be hit particularly hard because $1.2trn of its colossal $3.2trn of foreign reserve holdings are in US Treasuries.

In a sign of investors' skittishness, the rate on Treasury bills maturing next Thursday jumped to 28 basis points, or 0.28 per cent, yesterday, from 16 basis points on Thursday and virtually zero two weeks ago. By contrast, T-bills due to expire before Tuesday remained at virtually zero yesterday.

Xinhua's comments followed a call from Yu Yongding, a former Chinese central bank adviser, for the country to reduce its US Treasury holdings, saying: "US bonds are not safe, but people think they are. That is a mirage."

China has been "passively diversifying" its fast-growing foreign exchange reserves away from US Treasuries for the past six years, increasing its total holdings of American sovereign debt, but decreasing them as a percentage by acquiring a growing range of other overseas assets, according to David Mann, Standard Chartered's regional head of research for the Americas.

But economists say the rate at which China diversifies away from US Treasuries – and US assets in general – is likely to accelerate as a result of this crisis, even if the expected last-minute deal to raise the debt ceiling is cobbled together.

Mark Williams, the senior China economist at Capital Economics, said: "China can reduce its share of US Treasuries and there is inconclusive evidence to suggest that maybe it has already done that this year. That could reduce faster if there is a downgrade."

Mr Mann added: "Confidence in US Treasuries has been shaken and this could have an impact on Chinese ownership around the margin."

However, economists said China was unlikely to embark on any large-scale selling of US bonds because such a move could significantly reduce their value, while there is no viable alternative safe haven in which to invest such huge amounts. Furthermore, Chinese acquisitions of dollar-denominated assets are crucial to China's policy of increasing the attractiveness of its exports by keeping the value of its currency low.

In other signs of nervousness, CME, the world's largest futures exchange operator, asked traders to post more Treasuries as collateral for outstanding trades, to protect itself in the event of falling valuations. Meanwhile, money market funds dedicated to Treasuries pulled $21bn out of those funds this week, compared with an average inflow of $280m in the first three weeks of July, according to Crane Data.