Here’s a year-old quote from the Inner Workings blog of the Asia Times:
Dollar-denominated risk assets, including asset-backed securities and corporates, are no longer wanted at the State Administration of Foreign Exchange (SAFE), nor at China’s large commercial banks. The Chinese government has ordered its reserve managers to divest itself of riskier securities and hold only Treasuries and US agency debt with an implicit or explicit government guarantee … There is some speculation that China’s action has to do with the recent deterioration of US-Chinese relations over arm sales to Taiwan and other issues. That would be an unusual action for the Chinese to take–Beijing does not mix investment and strategic policy–and would be hard to substantiate in any event.
Almost exactly 12 months later — you can consider the speculation substantiated.
Reuters, AFP and the National Journal have all recently reported that China sought to use its substantial holdings of US debt to influence American financial policy, according to WikiLeaks’ diplomatic cables. That’s China attempting to influence stuff like the Taiwan arms deal, and reportedly requesting US Treasury secretary Tim Geithner help speed-up federal approval of China’s Morgan Stanley deal.
Some select cable-reading below:
China’s SAFE cautious about U.S. lending - October, 2008
Premier Wen’s comments on U.S. Treasuries – March, 2009
Hilary Clinton: “How do you deal toughly with your banker?” – December, 2010
And one for the Brits:
UK-CHINA ECON DIALOGUE: NO LONGER A “BLOODY DISASTER” - June, 2009
Related links:
Special report: China flexed its muscles using U.S. Treasuries - Reuters
China’s punishment, Treasuries’ pain – FT Alphaville