Chinese nervous about American economy

The New York Times reports that Beijing is becoming increasingly nervous about its high stakes in America’s economic well being:

Reversing its role as the world’s fastest-growing buyer of United States Treasuries and other foreign bonds, the Chinese government actually sold bonds heavily in January and February before resuming purchases in March, according to data released during the weekend by China’s central bank.

China’s foreign reserves grew in the first quarter of this year at the slowest pace in nearly eight years, edging up $7.7 billion, compared with a record increase of $153.9 billion in the same quarter last year.

China has lent vast sums to the United States — roughly two-thirds of the central bank’s $1.95 trillion in foreign reserves are believed to be in American securities. But the Chinese government now finances a dwindling percentage of new American mortgages and government borrowing.

In the last two months, Premier Wen Jiabao and other Chinese officials have expressed growing nervousness about their country’s huge exposure to America’s financial well-being.

Chinese reserves fell a record $32.6 billion in January and $1.4 billion more in February before rising $41.7 billion in March, according to figures released by the People’s Bank over the weekend. A resumption of growth in China’s reserves in March suggests, however, that confidence in that country may be reviving, and capital flight could be slowing.

The good news: the U.S. will become less dependent on China.

The bad news: America has to get its money from somewhere.

Although many Americans have complained in recent month about their dependence on China, the Chinese – interestingly enough – feel it is the other way around. One of the Chinese government’s top monetary economists, Yu Yongding,told the NYT he believes that the balance of financial power between the two countries is “mainly in favor of the United States.”

He explained this opinion by quoting John Maynard Keynes: “If you owe your bank manager a thousand pounds, you are at his mercy. If you owe him a million pounds, he is at your mercy.”

It will be interesting to see how both sides will deal with the economic crisis; it’s difficult to imagine that it will not have a tremendous influence on their relationship.