China vs. Japan: The Winner? The US

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Islands. Toyota dealerships. What aren’t China and Japan fighting about lately?

Here’s another area where Asian titans find themselves facing off: a dash to lend the US government trillions in exchange for some of the skimpiest interest rates on record.

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At the end of July, China and Japan owned roughly $2.27 trillion in US government bonds. That’s roughly 20% of the $11.12 trillion of publicly traded bonds that were floating around at that point.  (There’s another nearly $5 trillion in US government debt that’s not traded because it’s held in intergovernmental accounts used to fund programs like Social Security.)

Recently, Japan has been gaining ground on the People’s Republic, currently the largest creditor to the US. Behind this buying binge is Japan’s effort to weaken its own currency in order to support its export-dependent economy. (In general weak currencies favor exporters, because it makes their wares cheaper to foreigners.) To do this it sells yen, buys dollars and—to put the dollars somewhere—uses those dollars to buy Treasury bonds. While the US isn’t in the greatest fiscal shape, its relatively pristine credit history means that conservative investors still like to own dollar-based investments. The safest one is US government debt.

China also needs a safe place to sock away cash. Because it runs such a massive trade surplus with the US, Chinese businesses end up with a ton of greenbacks. By law—China has capital controls—companies have to turn greenbacks over to the Bank of China, which buys them with freshly printed yuan. The Bank of China then has a ton of dollars on its hands. What does it do with them? It buys a lot of Treasury bonds, essentially lending tons of cash to the US government.

At no point in this process are central bankers in Beijing and Tokyo especially concerned about the fact that they’re getting ridiculously low levels of interest to lend to the US.

Central bankers aren’t hedge funds. They’re not out to make a killing on risky junk bonds and snag a giant bonus. They’re risk-averse by nature. Both China and Japan just want a nice, quiet place to put a trillion dollars or so. And that’s why in this contest, the real winner is the US.