© Sankarshan Basu
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Professor Sankarshan Basu from IIMB shares his opinion on the matter.
Do you anticipate that Japan will become the largest foreign creditor of the U.S. in the nearest future?
It is unlikely that Japan will be the largest foreign creditor of the U.S. It will continue to be one of the largest creditors, and on a market fluctuation basis may become the largest creditor for a short period of time, though. However, it is unlikely that Japan would plan for such a position.
Moreover, the Chinese economy, once readjusted, will still be the fastest growing one, and it would need avenues for investment. In the current climate the U.S. is one of the safest investment opportunities, and I expect China to again pick up investment in the U.S. securities.
Why has Japan decided to boost its Treasury holdings? What are the reasons behind this decision?
It is very difficult to pin point a specific reason. Most likely it is the outcome of some amount of perceived safety in the U.S. securities. Moreover, there were very few alternate investment opportunities, hence Japan picked up a number of the U.S. securities. I am personally not so sure whether they planned the growth to be of this magnitude.
There is an opinion that China reduced its holdings of U.S. debt in order to diversify its foreign assets. However, U.S. Treasuries are considered to be safe haven assets. Why then China decided to diversify its portfolio and switch to other foreign assets amid global economic slowdown?
I think one should not look at the Chinese decision from external considerations, but more from internal considerations, and the issue it has with revaluation of the RMB. In my mind, the biggest problem of China is internal – the ability to maintain the high growth level. Thus, in order to spur growth they needed investments in the real sector, and hence the reduction in investments in alternate possibilities – to the Chinese U.S. Treasury investment is still an alternate investment, provided they do not need domestic investment.