How China’s Changing Appetite for Foreign Debt Affects ETFs

While America has accumulated massive amounts of debt over the years, countries seem to still lend to the United States and they are buying up Treasury bonds and feeding demand for the market. But a shift in attitude could benefit China’s economy and exchange traded funds (ETFs) while potentially hurting our own.China, the most fervent lender to the U.S. with more than $1 trillion in loans, spends around one-seventh of its economic output in buying foreign debt and is now the largest overseas holder of U.S. Treasuries, mainly short-term Treasuries, reports Keith Bradsher for The New York Times.

• iShares Barclays 1-3 Year Treasury Bond (SHY): down 0.4% year-to-date; 3.3% yield

The Chinese central bank is reducing the requirement of having banks give one-fifth of its deposits to the central bank, which is then used for buying up foreign currencies, and telling banks to lend more within China instead.

Reduced inflow of U.S. dollar into China are shown through these three trends:

1. The direct investment in China has fallen by more than one-third since summer.
2. Housing bust and a two-thirds fall in Chinese stocks have overseas investors withdrawing money out of the country.
3. Gradual reduction of China’s huge trade surpluses.

The effects of China’s investment in U.S. Treasury notes and other holdings are discussed by James Fallows on Fresh Air for WHYY on National Public Radio (NPR).

For the time being, there are investors on our own soil who are still seeking the stability of U.S. Treasury bonds due to economic uncertainty. But the United States may be pressured to increase interest rates to keep investors happy.