Confidential diplomatic cables from the U.S. embassies in Beijing and Hong Kong lay bare China's growing influence as America's largest creditor.
As the U.S. Federal Reserve grappled with the aftershocks
of financial crisis, the Chinese, like many others, suffered huge losses from
their investments in American financial firms — from Lehman Brothers to the
Primary Reserve Fund, the money market fund that broke the buck.
The cables, obtained by WikiLeaks, show that escalating
Chinese pressure prompted a procession of soothing visits from the U.S.
Treasury Department.
In one striking instance, a top Chinese money manager
directly asked U.S. Treasury Secretary Timothy Geithner for a favor.
In June, 2009, the head of China's powerful sovereign
wealth fund met with Geithner and requested that he lean on regulators at the
U.S. Federal Reserve to speed up the approval of its $1.2 billion investment in
Morgan Stanley, according to the cables, which were provided to Reuters by a
third party.
Although the cables do not mention if Geithner took any
action, China's deal to buy Morgan Stanley shares was announced the very next
day.
The two Treasury officials to whom the cables were
addressed, Deputy Assistant Secretary for Asia Robert Dohner and Deputy
Assistant Secretary for International Monetary and Financial Policy Mark Sobel,
declined through a spokesperson to comment for this story.
The State Department also declined to comment.
China is America's biggest foreign lender, playing a
crucial role in the U.S. Treasury auctions that allow Washington to borrow what
it needs to keep its government running. At the same time, the United States is
China's top export destination: America's trade deficit with the nation reached
a record $273.1 billion in 2010.
Most economists describe the two economies as
co-dependent.
The concern in certain influential Washington and Wall
Street circles is that Beijing would leverage its position as the main enabler
of U.S. overspending. And the cables provide a glimpse into how much politics
inform relations between the world's two largest economies.
One cable cites Chinese money managers expressing concern
that U.S. arms sales to Taiwan — a major, longstanding irritant in the
relationship — could sour the Chinese public on Treasury purchases.
The subject of Taiwan came up during an Oct. 9, 2008
meeting the U.S. financial attache's office had with Liu Jiahua, Deputy
Director General of China's foreign currency reserve manager, the secretive
behemoth known as the State Administration for Foreign Exchange, or SAFE.
"Liu observed that the recent U.S. announcement of
another arms sale to Taiwan made it more difficult for the Chinese government
to explain its policies supportive of the U.S. to the Chinese public,"
reads an account of his comments in one of the cables.
The cables also indicate a high level of confidence among
the Americans that China can't entirely stop buying U.S. debt, a sentiment
shared by most economists who describe the dynamic as a form of mutually
assured financial destruction. But the cables do show that China can and will
pull back, with financial repercussions.
In the spring of 2009, with U.S.-China financial tensions
running especially high, China's Treasury holdings fell to around $764 billion,
down from nearly $900 billion. In July, after tensions between the two nations
mostly subsided, its holdings rose to a record $940 billion.
During the financial turmoil, the cables show that
Beijing also shifted its portfolio away from longer-term Treasury notes, which
helped drive up America's long-term borrowing costs.
The collapse of Lehman had a swift and powerful impact on
SAFE.
"Several interlocutors have told us that Lehman was
a counterparty to SAFE in financial transactions and as a result SAFE suffered
large losses when Lehman collapsed," Deputy Chief of Mission at the U.S.
Embassy in Beijing Dan Piccuta wrote in a cable to Washington on March 20,
2009.
The hit to its balance sheet is likely what prompted a
Chinese official to tell a U.S. diplomat months earlier that SAFE was afraid to
re-enter the U.S. repo market — that is, it was reluctant to resume lending its
short-term Treasuries to counterparties wanting to use them as collateral in
cash loans.
On Oct. 9, 2008, officials from the U.S. embassy's office
of the financial attache in Beijing met with SAFE Deputy Director General Liu
Jiahua.
"SAFE is very concerned over the danger involved in
lending U.S. Treasuries to U.S. financial institutions in the repurchase
agreement market," Liu said.
Liu said SAFE's confidence in U.S. banks had been shaken.
SAFE had exited the repo market, which is a way for
corporations and financial institutions to borrow overnight.
The cable continues, "Liu remained noncommittal on
the possible resumption of lending, but agreed that SAFE had sufficient
confidence in those institutions and would consider a system whereby the
Federal Reserve or other U.S. government agency would act as a guarantor."
Public opinion clearly rattled China's financial leaders.
One cable shows Liu citing an internet discussion forum,
saying "the Chinese leadership must pay close attention to public opinion
in forming policies." The U.S. government does not appear to have offered
the Chinese a special setup guaranteeing U.S. banks.
Instead, the cables show, American diplomats reassured
the Chinese by pointing out that Washington had infused banks' balance sheets
with $700 billion in fresh capital, effectively propping up the banking system.
China holds hundreds of billions of dollars in debt
issued by Fannie Mae and Freddie Mac, the housing agencies known as Government
Sponsored Entities, or GSEs.
Like many other investors, it purchased agency debt
before the crisis with the expectation that Fannie and Freddie were implicitly
backed by the U.S. government.
In Sept. 2008, when the Treasury Department took control
of the two GSEs, SAFE officials grew alarmed, the cables show.
Suggestions that senior GSE debt holders would have to
take a haircut sparked a public outcry in China. The media warned that the
government's currency manager faced monstrous losses similar to those suffered
earlier by the nation's sovereign wealth fund, China Investment, after its
investments in U.S. financial institutions blew up.
Media outlets had already heavily criticized the
government for CIC's losses — a Financial Times story circulated by outlets
such as China Daily speculated that CIC had lost $80 billion of the
government's foreign reserves. In late 2008 Chinese newspapers routinely ran
headlines with the words "Fannie Mae" and "Freddie Mac"
spelled out in English.
To defuse the situation, the Treasury Department sent
Undersecretary for International Affairs David McCormick to Beijing for two
days in October 2008. The gesture went over well.
"All of Undersecretary McCormick's counterparts
appeared to appreciate his willingness to come to Beijing in the midst of a
financial crisis," Piccuta wrote in a cable dated Oct. 29, 2008.
"Interlocutors stressed that unless leaders' concerns about the viability
of banks and U.S. government-sponsored enterprises (GSEs) are assuaged,
lower-level officials will be constrained from taking on greater counter-party
risks."
The cables show McCormick trying to reassure the Chinese.
"In each meeting, Undersecretary McCormick
emphasized that even though the U.S. government did not explicitly guarantee
GSE debt, it effectively did so by committing to inject up to $100 billion of
equity in each institution to avoid insolvency and that this contractual
commitment would remain for the life of these institutions," Piccuta
wrote.
Pacific Rift
The U.S. Federal Reserve announced a program to buy
agency mortgage-backed securities and Treasuries in early 2009 to help flood
the financial system with liquidity and stop Treasury yields from rising. But
at first the purchases had very little impact on yields, which climbed steadily
while the Treasury Department's auctions of new debt wobbled.
In China, top officials began publicly criticizing the
inflationary side-effects of the Fed's program. They said the expansion of the
Fed's balance sheet would devalue their Treasury holdings — and indeed, the
Chinese public watched as Treasury yields rose and the older debt the Chinese
had sank in value.
On March 13, 2009, Chinese Premier Wen Jiabao said at a
press conference he was "concerned" about the security of China's
investments in U.S. Treasuries. The March 20 cable, titled "Premier Wen's
comments on U.S. Treasuries: Protect China's investments," documents a score
of Chinese officials discussing their worries about U.S. Treasuries and the
potential consequences of their uncertainty.
One economist at Caijing Magazine, which diplomats
described as a "respected" Chinese outlet, told U.S. officials in
late February "there has been a 'huge debate' within the government about
China's holdings of U.S. Treasuries."
According to the cable, the Chinese economist told U.S.
embassy officials that "SAFE has been shifting its portfolio toward
shorter-term assets to reduce the risk of capital losses from higher
inflation."
That information dovetailed with data, released many
months later, showing the Chinese had indeed sold longer-dated Treasuries and
bought more T-bills, which surged to $210 billion by May 2009. The move likely
contributed to the rise in long-term yields.
Geithner in Beijing
Tensions remained high during Geithner's visit to China —
his first as Treasury Secretary — on June 1 and 2, 2009.
Geithner, who has lived in China and other parts of Asia
and holds a master's in East Asian studies, met with top Chinese officials,
including the head of CIC, China's $200 billion sovereign wealth fund, and the
ministers of finance and commerce.
The trip had been scheduled for months with a predictable
agenda, but the meetings were full of spontaneous discussion and frank
complaints from the Chinese, the cables reveal.
Xie Xuren, China's minister of finance, met with Geithner
on June 1 and "expressed concern about the potential for inflation and the
long-term sustainability of U.S. budget deficits," according to a cable
detailing Geithner's visit, dated June 17, 2009.
The next day, June 2, CIC Chairman Lou Jiwei confided in
Geithner that his fund had halted all new investments in 2008 after the
financial crisis broke out, but had since scoped out a new stake in Morgan
Stanley, the U.S. investment bank.
At the time of Geithner's visit, Morgan Stanley was
planning a new share issue to raise funds to repay the government for the money
it received during the financial crisis.
"Lou asked if it would be possible for the Fed to
expedite approval of CIC's request that this investment be exempted from
restrictions on investment by bank holding companies, as the customary two-week
process for considering such exemption requests is too long to allow CIC to
take advantage of this opportunity," according to the cable.
There's no record in the cable of how Geithner responded,
but it was only a day later, on June 3, that CIC announced plans to purchase
$1.2 billion in Morgan Stanley shares.
A spokesperson for the Fed said in the instance of the
June 3 CIC investment, no application for an exemption was made to the Federal
Reserve Board.
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19/03/2009| |
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15/03/2009| |
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15/03/2009| |
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11/03/2009| |
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11/03/2009| |
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10/03/2009| |
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10/03/2009| |
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02/03/2009| |
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02/03/2009| |
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02/03/2009| |
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02/03/2009| |
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02/03/2009| |
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02/03/2009| |
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02/03/2009| |
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02/03/2009| |
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20/02/2009| |
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20/02/2009| |
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10/01/2009| |
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14/12/2008| |
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10/12/2008| |
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25/11/2008| |
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25/11/2008| |
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16/11/2008| |
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16/11/2008| |
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02/09/2008| |
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02/09/2008| |
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17/08/2008| |
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17/08/2008| |
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11/07/2008| |
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11/07/2008| |
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08/04/2008| |
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29/03/2008| |
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28/03/2008| |
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25/02/2008| |
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26/01/2008| |
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04/01/2008| |
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04/01/2008| |
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12/09/2007| |
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28/08/2007| |
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01/08/2007| |
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31/07/2007| |
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20/07/2007| |
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18/07/2007| |
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24/06/2007| |
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24/06/2007| |
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23/05/2007| |
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23/05/2007| |
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19/04/2007| |
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19/04/2007| |
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28/03/2007| |
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23/03/2007| |
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07/03/2007| |
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05/02/2007| |
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05/02/2007| |
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02/02/2007| |
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02/02/2007| |
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20/12/2006| |
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20/12/2006| |
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16/12/2006| |
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16/12/2006| |
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13/11/2006| |
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13/11/2006| |
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24/10/2006| |
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24/10/2006| |
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19/10/2006| |
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19/10/2006| |
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19/10/2006| |
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05/10/2006| |
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08/08/2006| |
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05/08/2006| |
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05/08/2006| |
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30/07/2006| |
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27/07/2006| |
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07/07/2006| |
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01/07/2006| |
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01/07/2006| |
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02/06/2006| |
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02/06/2006| |
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13/05/2006| |
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04/05/2006| |
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30/04/2006| |
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28/04/2006| |
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29/03/2006| |
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08/02/2006| |
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03/02/2006| |
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01/02/2006| |
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29/01/2006| |
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12/01/2006| |
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18/04/2005| |
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18/04/2005| |
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09/04/2005| |
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09/04/2005| |
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14/12/2004| |
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14/12/2004| |
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