Bilateral Data, Multilateral World

I remember that, a few years ago, it seemed to be a full-time job explaining to people why it didn’t matter very much whether the US bought its oil from the Middle East, Venezuela, or Angola. You had to lay out the basic idea of a commodity market and the market-level basis for supply, demand and prices. Do we have to do this now for bonds?

OK, the risk premia attached to different issuers differentiate bonds in a way that doesn’t apply to oil deposits, and it does matter when demand shifts from one borrower to another, but one cannot infer global demand for a country’s debt from bilateral data.

I see this morning that Floyd Norris finds it “extraordinary” that China could be reducing its holding of Treasuries in light of its continuing large current account surplus, and its policy of keeping its currency cheap. It is true, as Norris says, that transacting through third party brokers could gum up the statistics, but even so, there’s nothing supernatural about this situation.

The overall global payments balances suggest a different possibility. China, in view of the great downside risk of the euro and the importance of its exports to the Eurozone, as well as its interest in diversifying its reserve holdings, may be ramping up its purchases of European sovereign debt. This also makes it a player in the politics of the region, which are crucial to the future global financial landscape. (I am being purposefully vague here: you can fill in the blanks yourself regarding China’s specific motives in gobbling up likely-to-be-trimmed debt from the likes of Ireland and Spain.) But buyers need sellers. This means China’s demand for US debt has been displaced to those who would otherwise have bought (no doubt at a steeper discount) the European bonds China acquired.

Thus it happens that the extraordinary becomes ordinary. China’s surplus dollars find their way back to the US via a European stopover, and the Eurozone crisis is extended for a few more months.