Thread: Sino-US Relations, General Discussion.

I think at this point, no one would argue that the sino-us econ relationship is not important.










Zero Percent on Treasury Bills as China, Fed Converge (Update3)
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By Daniel Kruger

April 20 (Bloomberg) -- The last time U.S. Treasury bill rates headed toward zero percent investors were panicking. Now it’s an indication Federal Reserve Chairman Ben S. Bernanke’s efforts to revive credit markets are starting to work.

Rates on three-month bills turned negative in December for the first time since the government began selling them in 1929 as investors sacrificed returns to preserve principal. After increasing at the start of the year, rates have dropped 0.20 percentage point since the beginning of February to 0.13 percent.

Demand for bills is rising again because investors including foreign central banks are snapping up the shortest- term U.S. securities as the Federal Reserve buys Treasuries to drive down borrowing costs in a policy of so-called quantitative easing. China, the largest U.S. creditor, with $744 billion of debt, has questioned the practice and shifted purchases to bills from longer-maturity securities.

“There’s a group of investors out there who are looking at what the Fed is doing and the policy action they’ve taken and the asset purchases, and saying ultimately this is inflationary,” said Stuart Spodek, co-head of U.S. bonds in New York at BlackRock Inc., which manages $483 billion in debt. “You’re going to invest in very short-term bills because you absolutely need not just the quality but also the absolute liquidity.”

China bought $5.6 billion in bills and sold $964 million in U.S. notes and bonds in February, according to Treasury data released April 15. It was first time since November that China purchased more bills than longer-maturity debt.

Super Sovereign

Leaders of the second largest U.S. trading partner started voicing concern about their investments as Fed and Treasury officials pledged $12.8 trillion, the equivalent of 90 percent of last year’s gross domestic product, to pull the economy out of the worst recession in a generation.

People’s Bank of China Governor Zhou Xiaochuan called for the establishment of a “super-sovereign reserve currency” last month after Chinese Premier Wen Jiabao said he’s “worried” a weaker U.S. dollar may hurt China’s investments. Inflation and a depreciating dollar would erode the value of U.S. holdings owned by international investors.

At the same time, China added to its holdings. While Treasury depends on China to fund the deficit, exports account for about 40 percent of gross domestic product for the world’s most populous nation. China’s exports to the U.S. jumped 40 percent in March after slumping for five consecutive months.

‘Symbiotic Relationship’

Treasury Secretary Timothy Geithner refrained from labeling China as a currency manipulator last week, backtracking from an assertion he made during his confirmation hearings in January. In its first semiannual report on foreign-exchange policies since Geithner became secretary, the Treasury said April 16 that while China’s yuan remains “undervalued,” no country “met the standards” for illegal currency manipulation during the period of the report, from July 2008 through December 2008.

“China and the U.S. have a symbiotic relationship,” said Win Thin, a senior currency strategist in New York at Brown Brothers Harriman & Co. “We need each other.”

Treasuries lost 2.6 percent this year, according to Merrill Lynch & Co.’s U.S. Treasury Master Index, as the government increased bond sales to finance a federal budget deficit that President Barack Obama’s administration says may expand to $1.75 trillion.

Below Zero

The yield on the benchmark 10-year note rose three basis points last week, or 0.03 percentage point, to 2.95 percent, according to BGCantor Market Data. The 2.75 percent security due in 2019 fell 7/32, or $2.19 per $1,000 face amount, to 98 9/32. The yield fell to 2.88 percent at 8:18 a.m. in New York.

Three-month bill rates dropped five basis points last week to 0.13 percent. The rate was little changed today. Bills maturing in three months and less have returned 0.07 percent this year, Merrill index data shows.

In December, bill rates fell below zero as investors sought the protection of the safest government debt in the wake of the September collapse of New York-based Lehman Brothers Holdings Inc., the biggest bankruptcy in history.

Treasury sold $27 billion of three-month bills on Dec. 8 at a discount rate of 0.005 percent, the lowest on record. The U.S. also sold $30 billion of four-week bills at zero percent for the first time. U.S. government debt of all maturities returned 14 percent last year, the best since 1995.

Foreign Holdings

Foreign investors including central banks own $3.16 trillion, or 50 percent, of the $6.27 trillion in marketable Treasuries outstanding, according to Treasury data. The U.S. needs to raise $3.25 trillion this fiscal year, as the government finances bank bailouts, stimulates the economy and services deficits, according to Goldman Sachs Group Inc.

“The Fed made the dramatic announcement in March that it’s going to monetize some of that deficit,” said Richard Clarida, a global strategic adviser at Pacific Investment Management Co. and Columbia University economist, raising concern that the purchases may lead to faster inflation. “The difference in migrating to bills versus bonds is their exposure to interest rate movements. You’re taking less interest rate risk.”

Better Tone

The Labor Department said April 15 that the consumer price index fell 0.4 percent in March from a year before, the first annual decline since 1955. The drop provides Bernanke with more time to narrow the difference between what consumers pay to borrow and the costs for banks, following the Fed’s decision in December to lower its target rate for overnight loans between banks to a range of zero to 0.25 percent.

Consumers and companies are starting to benefit. Goldman Sachs and JPMorgan Chase & Co. reported higher-than-estimated profits last week, in part because of higher revenue from fixed- income markets. Both raised capital last week without government backing.

“The credit markets are achieving a better tone and getting stronger,” Dallas Fed President Richard Fisher said at a briefing in Shanghai on April 18. “Volatility has been dampened. It will take some time to correct the weakness we’re experiencing.”

Home mortgage rates have fallen to record lows, and borrowing costs for car loans have declined more than five percentage points since the Fed said March 18 that it would buy $300 billion of Treasuries to keep borrowing costs down, and raise its commitment to purchase mortgages to $1.25 billion.

The difference between the average 30-year U.S. mortgage rate and 10-year Treasury yields narrowed to 1.92 percent on April 17 from 3.07 percent on Dec. 19, the highest level since 1986, according to Bloomberg data. The gap averaged 1.75 percentage points in the decade before the credit crisis began.

“The bigger story is investors climbing out of the bunker and starting to take risk again as some of the recent data suggests the U.S. economy” will begin to recover, said Colin Lundgren, who manages $40 billion as head of institutional fixed income for RiverSource Institutional Advisors in Minneapolis.

To contact the reporter on this story: Daniel Kruger in New York at dkkruger1@bloomberg.net.
Last Updated: April 20, 2009 08:24 EDT

Originally Posted by xinhui

I think at this point, no one would argue that the sino-us econ relationship is not important.

Indeed.

"In 2008, China-US bilateral trade totaled 333.74 billion USD, an increase of 10.5 percent from 2007, the lowest growth rate in the seven years that passed since China's entry into the WTO. The data are included in a report issued by the General Administration of Customs of the PRC on February 5. The reduction in the share of Chinese products in the US market is worthy of attention.

The General Administration of Customs of the PRC points out that there are two main reasons for the recent downturn in China-US bilateral trade. First, the financial crisis has caused a drastic shrinkage in US consumer demand. Second, the cumulative effect of the appreciation of the Renminbi was felt intensely, directly weakening the competitive price advantages of Chinese products, especially for most of the traditional labor intensive products that do not carry much bargaining power among consumers, generally hurting exports to the US market."

Full story here http://english.people.com.cn/90001/9...4/6587568.html

IMO in the future the US & China should have the world's largest bilateral trade relationship by volume, even taking into account the economic crisis & the fall in exports. Presently it's the US & Canada who hold that distinction.

Nebula82.

Originally Posted by nebula82

IMO in the future the US & China should have the world's largest bilateral trade relationship by volume, even taking into account the economic crisis & the fall in exports. Presently it's the US & Canada who hold that distinction.

Ship volume will have a pretty tough time replacing truck volume.

This WSJ article argues for strengthening of China-US trade relations, not showing that trade relations are being strengthened.

Strengthen U.S.-China Trade Ties

27 Apr [WSJ] Economic links have always been an important basis for the China-U.S. relationship, and the growth in trade between the two countries has been robust since the establishment of normal diplomatic relations. Today, China and the U.S. are each other's second-largest trading partner; the value of the two-way trade in goods exceeds $300 billion.

U.S. businesses have benefited greatly. In the past five years, American exports to China have doubled. The U.S. trade surplus with China in services has grown 36% every year, and the overall value of U.S. export services to China exceeded $16 billion last year. U.S. businesses have invested more than $60 billion in 57,000 projects in China. In 2007, American-funded companies in China enjoyed a 17% increase of profit, while domestically the profit of U.S. businesses dropped by 3% on average.

But the commercial ties between our two nations are affected by the global financial crisis. Chinese statistics show bilateral trade dropped 6.8%, and U.S. investment in China slumped 19.4%, on a year-on-year basis in the fourth quarter of last year and the first quarter of this year.

History tells us that the more serious a crisis becomes, the more committed we must be to openness and cooperation. Regrettably, however, trade measures by the U.S. against China are on the rise. Recently, American industries have petitioned the U.S. government for antidumping investigations, and for investigations under the World Trade Organization's "special safeguard provision," which could restrict imports of Chinese products. This will seriously test China-U.S. economic and trade relations. ....