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Chinese Sale of US Bonds: Linked To Dalai Lama's Meeting With Obama?

The “China Daily” carried the following report on February 18,2010, the day on which President Barack Obama received His Holiness the Dalai Lama in the map room of the White House for what was described as a private meeting with the Tibetan spiritual leader:

“China drastically slashed its holdings of United States government debt last December, allowing Japan to retake its place as the largest foreign holder of US Treasury bonds. China sold more than $34 billion in short- and long-term bonds, leaving its total holdings at $755.4 billion, according to US Treasury data released on Tuesday (February 16).The country sold about $45 billion in US Treasuries in the last five months, Alan Ruskin, chief international strategist for RBS Securities Inc, said in a research note. He said it was a “long enough period to hint strongly at a trend”. Liu Yuhui, an economist with the Chinese Academy of Social Sciences (CASS), said now is a good time to cut holdings of US Treasuries as recent European debt concerns have driven up the US dollar. “China has chosen the right strategy in slashing its huge holdings of US government debt as the greenback rebounds,” said Liu, adding that there is no sign of change to the long-term weakness of the US dollar.Massive US deficit spending and near-zero interest rates would also further erode the value of US bonds, said Cao Honghui, director of financial market research at CASS. The White House released a budget plan on Feb 1 that predicted the deficit for this year would total a record $1.56 trillion, surpassing last year’s $1.4 trillion, which re-ignited China’s concern about its dollar assets. As one of the US’ biggest creditors, China has sought to diversify its portfolio of foreign exchange reserves over the past year as the share of US dollar-dominated assets is too large. ”

2. The Chinese decision to cut down its investments in the US Treasury Bonds seemed to have been taken weeks before Mr.Obama sought Congressional approval for the sale of a fresh arms package to Taiwan and the White House announced that he intended receiving His Holiness during the latter’s visit to Washington in February, but the prominent publication by the “China Daily” of the Chinese sale of some of its investments in the Treasury Bonds on the day His Holiness met Mr.Obama has given rise to speculation as to whether Beijing was seeking to convey a message to the US that in view of Mr.Obama’s decision to sell arms to Taiwan and to receive the Dalai Lama, the US can no longer count on China for helping it out of its financial crisis by stepping up investments in the US bonds.

3. It needs to be underlined that long before the recent tensions in Sino-US relations, Prime Minister Wen Jiabao had been speaking of the Chinese worries about the strength of the US dollar and Chinese economists had been talking of the need for China to diversify the investments of its foreign exchange reserves. Suggestions had been made even last year that China should emulate India and invest more in gold.

4. Moreover, while US announcements on the arms sale to Taiwan and Mr.Obama’s meeting with His Holiness were made in January, US spokesmen had been saying that Mr.Obama had mentioned about these things to President Hu Jintao when he met him in Beijing in November last. Thus, the US contention was that the public announcements of Mr.Obama’s decisions should not have come as a surprise to Beijing.

5.Against this background, there is no reason to believe that there is any linkage between the Chinese decision to downsize its holdings in the US Treasury bonds and the decisions of Mr.Obama to which China has reacted adversely.

6.It is however, interesting to note that the “China Daily” itself has drawn attention to the fact that while one expert sees a linkage, others don’t.

7. As expected, the Chinese Government has strongly protested against Mr.Obama’s receiving the Dalai Lama, but at the same time avoided any threatening language. The comments made by the Chinese Foreign Office spokesman in his daily media briefing were restrained in language. Chinese analysts have described the meeting as reflecting the continuing cold war mentality on certain issues affecting China in the US.

8. The Chinese have continued to follow their recently-noticed policy of avoiding any demonisation of His Holiness.

( The writer, Mr B.Raman, is Additional Secretary (retd), Cabinet Secretariat, Govt. of India, New Delhi, and, presently, Director, Institute For Topical Studies, Chennai. He is also associated with the Chennai Centre For China Studies. E-mail: )

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