Reuters is out with a big story on some new WikiLeaks cables that purport to show how China flexed its muscle to influence US policy during the crisis.
The subtext is this: If you thought the Chinese had us over a barrel, you’re right, they do!
We’re not so sure.
Let’s address two key points made by the article.
The first is that during the crisis, the head of a Chinese sovereign wealth fund directly asked Tim Geithner to speed the approval of an investment in Morgan Stanley.
Two days later, China made its investment.
This really doesn’t show anything. Remember, normal approval processes were being ripped up left and right at the time. The idea of the US not expediting something so urgent is laughable.
Now the other aspect of the story concerns China supposedly reducing its Treasury holdings as a retaliatory move against US policy.
In the spring of 2009, with U.S.-China financial tensions running especially high, China’s Treasury holdings fell to around $764 billion, down from nearly $900 billion. In July, after tensions between the two nations mostly subsided, its holdings rose to a record $940 billion.
That sounds ominous — they dumped our debt! — but the real story is that it didn’t matter in the market. We never had a problem financing ourselves, and it took until the end of 2009 for Treasuries to fall back to where they were pre-crisis (remember, they received a gigantic flight-to-safety bid at the time that everything was hitting fan).
Then there’s this from Reuters:
The U.S. Federal Reserve announced a program to buy agency mortgage-backed securities and Treasuries in early 2009 to help flood the financial system with liquidity and stop Treasury yields from rising. But at first the purchases had very little impact on yields, which climbed steadily while the Treasury Department’s auctions of new debt wobbled.
In China, top officials began publicly criticising the inflationary side-effects of the Fed’s program. They said the expansion of the Fed’s balance sheet would devalue their Treasury holdings — and indeed, the Chinese public watched as Treasury yields rose and the older debt the Chinese had sank in value.
It may be true that Fed Treasury buying caused US debt to shrink in value, but the implication that it was due to “inflation side-effects” is totally wrong. The Fed’s expansion of the balance sheet helped stem the crisis, and thus the flight-to-safety bid dissipated for Treasuries. That’s why yields rose up again, and bond values declined.
Every country looks out for its own economic interests, but at least from this report, it doesn’t look like the Chinese had any unusual concerns, or the Treasury did anything too special to help them out.