America’s leading public finance watchdog has sounded a warning that the US economy is vulnerable to hostile financial actions by nations that are not its “allies”.
David Walker, the US comptroller general, indicated that the huge holdings of American government debt by countries such as China, Saudi Arabia and Libya could leave a powerful financial weapon in the hands of countries that may be hostile to US corporate and diplomatic interests.
Mr Walker told The Times that foreign investors have more control over the US economy than Americans, leaving the country in a state that was “financially imprudent”.
He said: “More and more of our debt is held by foreign countries – some of which are our allies and some are not.”
Mr Walker, who heads the Government agency that is responsible for auditing the national accounts and is also the arm of Congress that scrutinis-es spending by the Administration, said that the US has been forced to rely on foreign investors more because Americans are saving so little.
According to US Treasury Department statistics, Japan is the biggest foreign holder of US Treasury bonds, with almost $623 billion (£310 billion) of US government debt as of December last year. Mainland China is the second biggest investor, with about $397 billion, and oil exporters, which include Iran and Saudi Arabia, had $110 billion.
The UK, while the biggest foreign investor in US equities, is the fourth-biggest holder of US Treasuries.
While Mr Walker referred to Britain as “the best ally the US could hope for”, he told The Times that “anybody who looks at that list will see that some of the countries there are not traditional US allies. You will see that China, Korea and a number of Opec nations are there. Not all the countries on the list share the same economic, national and foreign polices as the US.”
The worry is that should any of these foreign nations choose to reduce their holdings significantly, it would trigger sharp falls in US government bond prices, driving up their yield, which would raise borrowing costs sharply for American consumers and companies. While most economists take the view that countries such as China are unlikely to reduce their US bond holdings because they would also suffer a fall in the value of their own investments, China could still be perceived as holding a powerful financial weapon.
Ian Shepherdson, an economist at High Frequency Economics, said: “The US has a symbiotic relationship with China. The US cannot afford for China to sell its US treasuries but, equally, China cannot afford to see the value [of its treasury bonds] slide. They are strategic enemies and are in a financially weird relationship. China’s holdings represent about a third of Chinese GDP.”
China has been buying US Treasury bonds faster than any other big country – it has increased its holdings sixfold in six years. Beijing has accumulated the bonds as a consquence of its extensive programme of intervention in the currency markets. To hold down the value of the yuan, China buys dollar assets and sells the yuan, timesonline.co.uk reports.
Asian countries are unloading U.S. Treasury securities and expanding their investments in stocks and currencies in denominations other than the U.S. dollar. The resultant loss in U.S. foreign currency reserves could forecast an overall economic downturn for the United States.
According to data posted on the U.S. Treasury DepartmentЎЇs web site over the weekend, outstanding U.S Treasury securities held by Korea and Japan amounted to US$52.1 billion and US$615.2 billion as of the end of May. This year alone, net sales for the two countries amounted to $14.6 billion and $7.7 billion, respectively. China, which added $86.9 billion in U.S Treasury notes with three years or longer in maturity last year, bought a mere $10.5 billion during the first five months of this year.
As for Treasury notes with three years or longer in maturity, which most Asian countries prefer to other securities, the change becomes more apparent. During the first five months of this year, Korea, China, Japan, Taiwan and Hong Kong sold a combined $10.4 billion worth of the Treasury notes. This figure compares with the combined $52.8 billion in net sales of securities that the five Asian countries bought last year , english.hani.co.kr reports.
Prepared by Alexander Timoshik
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