European economic crisis increases demand for safe financial assets

China, the biggest creditor to the United States, increased its holdings of US Treasury bonds for a third consecutive month in March, remaining the No 1 foreign holder ahead of Japan, the Treasury Department said ON Tuesday.

The monthly Treasury International Capital report, or TIC, showed that foreign demand for US financial assets rose more than expected in March. Total foreign holdings of US debt went up 0.3 percent to $5.12 trillion - an eighth straight monthly increase.

Included in that total were China's holdings of $1.17 trillion, rising $14.7 billion, or 1.3 percent, from February when China had net sales of more than $11 billion.

Experts say the debt crisis in Europe contributed to the continued high demand from abroad for US Treasury issues.

"At present, economic and market uncertainty in Europe is promoting a flow of funds of safe assets such as US Treasury bonds," said Lawrence Goodman, president of the Center for Financial Stability, a think tank in New York.

"Foreign and domestic US purchases of Treasury bonds were recently lower during a period of reduced economic and market stress in Europe. Federal Reserve purchases of Treasury also kept interest rates artificially low," he added.

Debt-stricken Greece on Tuesday, before the TIC data release, announced a second election after the first one failed to produce a government willing to follow through on steep budget cuts demanded by the country's lenders. The news deepened a sense of instability in the euro zone and sent investors back to the US market.

Japan cut its March holdings by 0.2 percent to $1.08 trillion but remains the second-biggest investor in US debt. Previous data showed that Japan had increased its holdings by around $200 billion since June 2011 and has narrowed the gap with China.

Dominic Ng, chairman and CEO of East West Bancorp in Southern California, said Japan is unlikely to overtake China as the leading US creditor because "US-China bilateral trade is going to get bigger".

"The Chinese economy is getting bigger and bigger and the purchase of Treasury bonds is not just for investment purposes only. Owning US liquid dollar investments is also important for trade settlement and hedging," said Ng, who also heads the Committee of 100, a nonprofit that promotes US-China relations.

The organization's recent opinion survey on US-China trade and investment showed that about 90 percent of Americans consider US Treasury bonds "a safe investment" while about 60 percent of Chinese respondents say otherwise.

"Naturally, Chinese people are still concerned about the US economy and feel somewhat unsafe about the US Treasury bonds that the Chinese government is investing in heavily," Ng said, adding that China's leaders, however, have "substantially better information of the overall balance sheets of US Treasury and Federal Reserve Bank".

"They have direct dialogues with senior US financial officials and know much better about the safety and soundness of US Treasury bonds," he added.

Ng, however, said China should diversify a portion of its more than $1 trillion in US investment away from Treasury issues because directly investing in the US economy will produce better returns.

"Capital investment from Chinese business or government to local economies or small to midmarket enterprises in the US will help the US to grow its economy and create more business and consumer confidence, and create more jobs in local markets," the banker said.

Goodman expects China to remain a strong buyer of US Treasurys, as the securities represent "a deep and liquid store of value".

"As China's trade surplus falls, resources will be increasingly devoted to domestic consumption and raising the standard of living in China. Thus, surplus pools of capital will be lower as will purchases of Treasury bonds," he said.

"US Treasury bonds are safe," Goodman added. "However, important questions will continue to center on the resolution of budget deficits and debt management strategy" by Washington.

yuweizhang@chinadailyusa.com