China Escalates Treasury Purchasing Debate

The topic of whether China has decided it has had enough of U.S. Treasuries, or is just posturing, has gained significant traction recently. The latest development comes from Luo Ping, an official at the China Banking Regulatory Commission, who said holding U.S. government bonds "is not the only option for investing reserves." According to Bloomberg:

U.S. debt is one option in addition to gold and other government debt, Luo, head of the training center at the banking regulator, was quoted as saying in an interview with [China News Service] late yesterday. If the U.S. government issues too much debt in its efforts to revive the economy, all Treasury holders will suffer losses, he added, the Chinese-language report said.

This comes on the heels of his prior announcement that there are few alternatives to holding U.S. debt, exacerbating the potential diplomatic ramifications. While conventional wisdom is that any change in the Chinese status quo with regard to Treasury purchases would be Mutually Assured Destruction, the increasing amount of chatter coming out of high up individuals discussing displeasure with this status quo should not be simply dismissed.

Ironically, this statement comes on the heels of Israel's disclosure that it plans on selling sovereign bonds abroad to finance its projected $7.4 billion deficit this year, and a day after Germany was unable to find enough buyers for the most recent issue of 10-Year Bunds. While China will likely not cease purchasing government securities altogether, it will definitely have an abundance of upcoming supply to choose from, making Geithner's job all that more difficult as he embarks on the most comprehensive Treasury issuance campaign in recent history.