Tuesday, June 22, 2010

Firmer yuan may lift U.S. Treasury demand

SEOUL: China may have to buy more rather than fewer U.S. Treasury bonds if the yuan appreciates, a senior official at Fitch Ratings said on Tuesday, June 22.

Expectations that following Beijing's shift to a more flexible currency regime China may need to buy fewer Treasury bonds than in the past when it tried to hold down the value of the yuan, pushed down U.S. government bond prices on Monday.

"I don't buy that story. It's not necessarily the case," Brian Coulton, head of global economics at the ratings agency, told Reuters in an interview.

U.S. Treasury debt prices fell on Monday as China's promise to allow more currency flexibility stirred expectations that it may not need to intervene to buy dollars as aggressively as before and thus have less demand to buy U.S. Treasuries.

But Coulton said expectations of an appreciating yuan would boost capital flows into China, resulting in increasing currency reserves eventually and in turn a greater need to invest them in liquid U.S. Treasury bonds.

Coulton, in Seoul for a seminar, also said China's move to allow more flexibility in the yuan regime would not prompt in itself a ratings upgrade but was supportive of the country's current A-plus long-term rating.

"We have identified potential threats to the macroeconomic stability because of the pattern of the domestic demand growth," he said, adding the overheated growth was a more direct concern in terms of the country's credit ratings.

"To the extent that it reduces export demand, it will probably slightly lower growth. That's a good thing," he said.

He added the risk of the euro zone economy falling into a double-dip recession haD increased over the past three months mainly due to weakened confidence in the private sector about the economic outlook.

"(The increased risk came) not from the fiscal side but from the confidence side," he said, referring to worries fiscal austerity efforts in euro zone economies could cut down demand for imported goods.

"Companies tend not to build new factories when there is a financial crisis," he said.

Coulton said a successful stress test on Spanish banks would help ease doubts and anxiety among investors toward the banking system in the country.

"One of the reasons the U.S. stress test was successful was that there were a lot of details," he said, in response to a question about stress test of European banks as a whole.

"Once you identify problems publicly, you have to then show how you will fix them. That's an important part of the stress test," he added. - Reuters

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