Investors took a> break this week from worrying about the European debt crises to consider a different kind of debt crisis one which some say leaves the U.S. vulnerable to a political assault from China.
Rumors swirled this week that China was considering selling off its stake in U.S. Treasurys. Market observers and China s State Administration of Foreign Exchange, or SAFE, China's foreign-exchange agency -- were quick to dismiss the concerns. China holds nearly $2.5 trillion in U.S. and other major currency issuer debt, which would make their exit from a position very problematic, says Marc Pado, chief U.S. strategist at Cantor Fitzgerald. SAFE said in a statement that the $900 billion it holds in U.S. Treasury debt "should not be politicized."
The Chinese administration went on to allay investor concerns, saying that the U.S. Treasury market is a very important market for China." Another rumor -- that China might be considering gold as an alternative -- was also put to rest, as SAFE said the gold market was not large enough for such participation and that buying big gold holdings would cause price swings.
Here s what two industry watchers, one focused on the U.S. and the other on Asia, are saying about the situation:
Who s talking: Ray Jovanovich, director and chief investment officer - Asia, Amundi Asset Management
The gist: It shouldn t alarm anyone that the Chinese Central Bank and authorities of other central banks have been diversifying positions.
There s fear in some quarters about China selling down stakes in U.S. Treasurys, and recently they ve been buying Japanese government bonds. But Jovanovich says diversification is a natural course of events, and a sale of truly large proportions is unfeasible. China owns roughly 20% of U.S. debt, and that s a difficult position to exit. Selling to the market won t work, and everyone would get wind of it, he says.
Moreover, the use of such methods as a political tool doesn t make sense. Historically, as well as more recently, China and the U.S. have had an exceedingly strong relationship at many levels, says Jovanovich. Inevitably great partners have disagreements, but I don t see anything to warrant the use of Treasury holdings as a weapon against the U.S.
Jovanovich says the real problem is the amount of debt the U.S. has amassed. The fact is the U.S. needs to pay down debt and get its fiscal house in order, and it needs to do it soon, he says. If we don t do that, and we go further out with piling up more and more debt, that s going to be a major problem -- China isn t the only one we ll have to worry about.
Who s talking: Marc Pado, chief U.S. strategist, Cantor Fitzgerald
The gist: Political games are being played by both the U.S. and China, but China exiting from U.S. debt just doesn t add up.
If there s so much as a hint that China is going to sell [its U.S. debt holdings], then the bonds would plummet, rates would skyrocket and they d be stuck holding the bag for trillions in losses, Pado says.
Pado concedes that it s a political game. Owning the debt of a country puts the owner in somewhat of a position of power when negotiating trade. That s what they d want, and it doesn t make sense that they d abandon that, he says. But it creates enough fear that people panic.
It s opportunistic for the U.S. as well. When trade becomes an issue, they ll jump on the negative aspects of China holding our debt when it fades, China holding it is a good thing because somebody has to hold our debt, he says.
Pado also says that ultimately it comes down to the U.S. carrying too much debt, and the debt problem is a politically unsavory one to solve. You either have to stop giving [Americans] things or start taking more money away from them it s not very difficult math but the problem is you don t get votes for solving that problem, he says.