[Marxism] China's holdings of US Debt

Marv Gandall marvgandall at videotron.ca
Tue Mar 3 15:12:55 MST 2009

Artesian asks:

So what are the origins of the reserves held by China's central bank?

MG: The central bank purchases USD's from Chinese commercial banks with
Chinese yuan. The central bank then (1) buys US bonds and other securities
with these USD's to maintain a favourable exchange rate with the USD to
support it's exporters and (2) To guard against inflation induced by the
"excess" yuan it injects into the system, the central bank simultaneously
"sterilizes" it's USD purchases by withdrawing the excess yuan from the
system through the issuance and sale of Chinese government bonds to the

Art: What are the origins of the reserves that are used by all the banks to
purchase US debt instruments?

MG: The commercial banks are not permitted to buy US debt instruments or
other USD-denominated investment purposes on their own because of Chinese
currency controls.  The State Administration for Foreign Exchange (SAFE) has
gradually relaxed controls to allow importers to accumulate dollars, euros,
and yen to pay foreign suppliers for goods and services. But the use of FX
for the private purchase of US government debt or other investments remains
tightly regulated, as does the repatriation of profits.

The currency controls force the banks, in effect, to buy Chinese rather than
US government debt, as described above. Because of the currency controls,
the Chinese, as you know, have never been burnt by hot money flows in and
out of the country of the sort which brought other East Asian nations,
Russia, Argentina, etc. to their knees a decade ago.

Art: What are the origins of the dollars that are used in the purchases?

MG: Chinese and foreign exporters deposit their foreign earnings into the
commercial banks which, as indicated above, are then mostly passed on to the
central bank.

Art: I believe it is a mistake to simply, and immediately, identify these
"demand deposits" as somehow "belonging"  to the Chinese govt.

MG: Since the central bank effectively appropriates the USD's from the banks
in exchange for yuan and controls the disposition of these USD's into global
capital markets, it would not a mistake to identify these private bank
deposits as "somehow 'belonging' to the Chinese government."

Art: No doubt,  no doubt whatsoever, that if the US for example had not
stepped in to guarantee the GSE debt of FNMA and FMAC, the Chinese banks
would have howled to the central bank, the central bank would have howled to
its own government and directly AT the US govt., but I do not believe that
the potential for howling gives China economic leverage over the US.  I
think if the US hadn't stepped in... well, looked what happened after Lehman
Bros was allowed to sink...

MG: There was, in fact, much reported "howling" behind the scenes from China
to the Bush admin when there were suggestions circulating in the US that the
"implicit" guarantee of these bonds might not be honoured. The USG
reportedly guaranteed Freddie and Fannie debt primariily under heavy
pressure from the Chinese government. Since then, the Chinese have lightened
up on both agency debt and long Treasuries. They have actually increased
their purchases of USD securities, but have switched to much shorter
maturities because they feel too exposed to a crash at the long end.

We can disagree over whether China's USD holdings give it any economic
leverage over the US. I believe they're are in a much more advantageous
position as a creditor nation than countries which have been in hock to the
US - as China once was before its revolution.


Art: Anyway, I really am compelled to induce part of this analysis as I
can't get hold of any sold numbers of cash assets held by multinationals in
China-- but I think it makes sense.  Of course, I would say that, wouldn't

MG: Like M. Lebowitz and L. Willms, I have never seen anything anywhere to
support your hunch that a portion of the multinationals' FX earnings are
held "on account" by the Chinese central bank.

As indicated above, my clear understanding is that these earnings are held
on account by the Chinese commercial banks until they are exchanged for yuan
up by the PBC which then converts the USD's into US debt. The balance of
USD's on deposit in the commercial banks are converted into yuan by the
multinationals to pay their domestic suppliers and workers. A portion
probably sits on their books as "retained earnings".  Chinese government
estrictions aside, the US mulitnationals are reluctant to repatriate their
export earnings for tax reasons, and suggestions by the Obama administration
that it may close this profitable tax loophole are being strongly resisted
by the corporations, for whom an increasing percentage of their profits have
been earned by their subsidiaries overseas.

Also worth noting is that until the recent crisis collapsed trade everywhere
multinationals in China were selling more into the expanding Chinese home
market than they were abroad. As exporters, they have been very happy to see
an undervalued yuan which makes their products more competitively priced in
Europe, NA, and Japan. They have consequently been strong supporters of
Chinese government purchases of USD's in order to keep down the value of the
yuan. They would have no self-interest in sequestering USD's from the
central bank which are otherwise being used in defence of a cheaper yuan.

Walmart is perhaps the most notable example of a company supporting the
PBC's use of dollars earned by the country's exporters. It has led the
opposition to calls - mainly from congressional Democrats - to label China a
"currency manipulator" and to otherwise pressure the Chinese government to
revalue the yuan upwards.

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