Analysis: What is Plan B if China dumps its U.S. debt?
By Emily Flitter
NEW YORK
Tue Jan 18, 2011 4:34pm EST
Translation by Autumnson Blog
(Reuters) - When borrowing money it's always good to have a Plan B in case a big creditor pulls the plug. That should be true whether the sum is a few thousand dollars or about a trillion, the size of the United States government's debt to China.
（路透社） - 當借款時有一個B計劃總是好事，倘若有一位大債主拉插頭。那應該是真的，不管總數是幾千元抑或約一兆億，美國政府欠中國的債務的大小。
With Chinese President Hu Jintao due to arrive in Washington on Tuesday, it is worth asking about U.S. officials' Plan B just in case one day relations take a surprise turn for the worse and Beijing dumps its holdings of U.S. treasuries.
隨著中國國家主席胡錦濤週二抵達華盛頓，是值得一問美國官員的B計劃，以防有一天關係突然急轉惡化和北京拋售其持有的美國國債。
China is officially the United States' biggest foreign creditor, with roughly $900 billion in Treasury holdings -- or over $1 trillion with Hong Kong's holdings included.
中國正式成為美國最大的外國債權人，擁有大約 9,000億美元的國債持有量 - 或超過 1萬億美元如香港的持有量包括在內。
That means it could do severe damage to U.S. debt markets if it suddenly started selling large amounts.
那意味著它可以對美國債券市場做成嚴重的破壞，如果它突然開始大量銷售。
Most experts say if there were signs of this happening, the U.S. government would go for a combination of persuading Americans to buy more U.S. debt, the same way they did in World War II, and finding friendly foreign governments to make additional purchases.
大多數專家說如果有這情況的跡象發生，美國政府會有一套做法可行，去說服美國人購買更多的美國債務，他們在第二次世界大戰中做的同樣方法，及找友好的外國政府作額外購買。
Banks could be called on to increase their holdings of treasuries, and as a last resort, the Federal Reserve could also be called on to fill the gap, though this could risk turning any dollar weakness into a slump.
銀行可能被要求增加其持有的國債，並作為最後手段，美聯儲亦可能被要求去填補差額，雖然這可能危害美元，由疲軟轉成大跌。
"The U.S. government should have and maybe still could call on the people of the U.S. to invest in U.S. debt," said David Walker, a former U.S. comptroller general who heads an advocacy group calling on the government to curb the U.S. budget deficit and borrowings.
“美國政府應該有和也許仍然可能呼龥美國人投資美國國債，”美國前總審計長大衛沃克說，他負責一倡導團體呼籲政府遏制美國預算赤字及借款。
To be sure, the idea that China would suddenly sell its U.S. debt holdings is almost unimaginable to some.
肯定的是，中國會突然出售美國國債持有量的想法，對一些人幾乎是無法可想的。
After all, any weakening in the U.S. debt markets and the resulting global markets turmoil, including likely weakness in the dollar, would bounce back on China and could hurt its economy badly, especially as the United States is such a huge Chinese export market.
It likely would take something like a massive rise in tensions over an issue like Taiwan or oil exploration in disputed areas of the South China Sea, including possible military confrontation between the two nations. Such a confrontation would also make it easier for Washington to appeal to the American public to buy its debt for patriotic reasons.
But Beijing could also justify pulling back sharply from U.S. Treasuries if the dollar were to plunge, perhaps because of Washington's failure to curb its budget deficit and debt.
"I worry that we could be at a tipping point," said Eswar Prasad, a Brookings Institution economist and former International Monetary Fund official with responsibility for China.
"If the Chinese say 'We're not buying any more Treasuries,' this could act as a trigger around which nervous market sentiment coalesces," he said. "People could start wondering how the U.S. is going to finance its deficit."
APPEAL TO OTHER COUNTRIES
In 2009, economist Brad Setser suggested the United States could establish emergency currency swap lines with political allies if a country like China ever abandoned the U.S. debt market.
But the list of countries prepared to step in as buyers when U.S. Treasury officials try to hawk U.S. debt or seek foreign currency loans has probably changed somewhat since Europe became mired in a debt crisis.
Since Setser's proposal appeared in a memo published by the Council on Foreign Relations, Germany has had to throw billions of euros behind other euro zone countries' debt to keep the euro zone intact. With other European countries drawing on swap lines established by the Fed, they are hardly in a position to support the United States.
Japan could step in with some additional purchases, but they may be limited, given it has a massive domestic debt burden and is currently campaigning for more Japanese savers and companies to buy its own debt.
Other countries in the region that already buy large amounts of U.S. Treasuries to try to keep the value of their currencies from climbing, such as Thailand and India, or countries with large sovereign wealth funds, such as Singapore, could also be called on to increase their purchases.
Then there are the oil producers in the Middle East, such as Saudi Arabia and the United Arab Emirates, which have traditionally been seen as American allies. Together, the region's oil producers hold around $210 billion in Treasuries.
"These countries all have a massive amount of dollars invested in Treasuries already," said Eric Stein, vice president and portfolio manager at Eaton Vance in Boston. "It would be hard for them to commit to incrementally increase their holdings."
Nevertheless, analysts think a pledge by several major powers to support U.S. debt prices with scheduled purchasing operations could calm the Treasury market.
The price for the United States could be high, though. One banker who wished to remain anonymous suggested that in an extreme scenario, the United States might even need to peg the dollar to a basket of other currencies to reassure foreign investors that their purchases would not suddenly devalue.
QE-3?
Another quick fix would see the Fed step in -- again.
After all, at $600 billion, the size of the Fed's second quantitative easing program, announced November 3, is larger than the total amount of Treasuries China bought in 2010.
According to Treasury data released on Tuesday, China's gross purchases of long-term Treasuries totaled roughly $260 billion from January to November last year, with China remaining the largest single holder of Treasuries.
But Fed purchases might only work if inflation were still low and the economic recovery sluggish.
Otherwise it might backfire as the perception that the Fed was printing money and devaluing the dollar could cause the currency to take a big hit and bring down other U.S. assets, including treasuries, with it.
"The Fed could try to intervene, but if that led to higher future inflation expectations, it would not hold down rates but rather push them up," said Benn Steil, senior fellow and director of international economics at the Council on Foreign Relations.
Treasury officials already tout the increasing demand for Treasuries from U.S. domestic savers. But Walker, the former comptroller general, sees potential for a more aggressive effort to market Treasuries to Americans that could help shift the government away from dependence on foreign creditors.
In his view, the efforts would have to include an appeal to patriotism and come with a longer-term plan to rein in the budget deficit.
"What we need to do is have a plan that's reasoned, reasonable, can reassure our foreign lenders and also demonstrate to the American people that Washington can get something done," Walker said.
Eaton Vance's Stein said U.S. banks could also be pressured, or even forced, to buy more treasuries as part of their capital cushions.
"It seems maybe on some level unbelievable that that would happen in the U.S.," Stein said. "But other countries even now, if they can't find anyone to take down their paper, will turn to domestic banks."
(Editing by Martin Howell and Dan Grebler)
http://www.reuters.com/article/idUSTRE70H5NX20110118?pageNumber=3
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