THIS STORY HAS BEEN FORMATTED FOR EASY PRINTING

Countries unlikely to dump holdings

A man walked by a money exchange outlet in Hong Kong yesterday. Chinese state media chastised the United States after the nation’s unprecedented ratings downgrade, saying it needed to cure its addiction to borrowing. A man walked by a money exchange outlet in Hong Kong yesterday. Chinese state media chastised the United States after the nation’s unprecedented ratings downgrade, saying it needed to cure its addiction to borrowing. (Dale De La Rey/ AFP/ Getty Images)
By Christopher Anstey
Bloomberg News / August 7, 2011

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TOKYO - Asian states and Russia are expected to retain their US Treasury holdings as European governments expressed confidence in the world’s largest economy despite the decision by Standard & Poor’s to cut the US credit rating.

For all the angst, policy makers from China to Japan to Southeast Asia are drawn to the holdings as a result of efforts to stem gains in their currencies against the dollar, which would impair export competitiveness.

Asia accounts for about half of foreign-owned US debt and China is the largest individual foreign holder, according to Treasury data.

Chinese officials are concerned that its substantial holdings of US debt, worth at least $1.16 trillion, are being devalued, but analysts said China has few options other than to continue buying US government bonds.

China’s official Xinhua News Agency said the United States must cure its addiction to borrowing.

“The US government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone,’’ read the commentary, which was published in Chinese newspapers.

Trade and current account surpluses have helped China accumulate the vast foreign exchange reserves. It has invested much of those reserves in US bonds, largely because the US market has long been considered the safest and most liquid bond market in the world.

Analysts said China could also buy bonds in the European and Japanese markets but that those two markets are not big or liquid enough to absorb its exchange reserves.

Investors in Treasury holdings earned 3.12 percent in the three months ending July 31, based on Bank of America Merrill Lynch data.

Russia considers US debt reliable and will not review its policy of investing in the country, Deputy Finance Minister Sergei Storchak said yesterday, adding that the credit rating downgrade “can be ignored’’ for long-term investment strategy. Russia is one of the 10 largest foreign holders of US government debt.

Japan, the second-largest international investor in American government debt, sees no problem with trust in the securities, a Japanese government official said on condition of anonymity.

South Korean officials put the S&P downgrade on the agenda of an emergency meeting on global turmoil.

With Europe battling its debt crisis, France joined the Obama administration in questioning S&P’s reasoning.

In the United Kingdom, the world’s third-largest foreign holder of US debt, Business Secretary Vince Cable said the dollar is “the key international currency’’ in the short run.

“Although the American legislators made a terrible mess of things a few weeks ago, they have now got things back on track and undertaken to manage their debt in a prudent way,’’ Cable said in an interview with the BBC.

Financial officials from the Group of Seven industrialized nations will hold a conference call on how to coordinate action among their countries’ central banks.

Many economists see the world’s big central banks as the last line of defense in the worldwide debt crisis, after policy makers in Europe and the United States failed to agree on the kind of moves that many investors demand.

Because they have the power to increase the money supply, many central banks around the world have intervened in bond and currency markets in recent years in an effort to shore up their countries’ struggling economies.