The US government used to depend on China to fund its deficit. In 2006, China bought 47.4% of all US bonds issued. But last year, as the chart from the NY Times shows, China bought just 4.6%, leaving US investors to buy the rest.
This is a yet another indicator of the profound changes underway in global finance. China couldn’t afford to lend as much to the US, as it was already lending $1.4trn to its domestic economy. Equally, the so-called ‘virtuous circle’, whereby China lent money to the US to fund purchases of China’s goods, has come to an end.
China’s departure has hardly been noticed in US government bond markets, even though interest rates are low, and US borrowing has risen from $300bn in 2007 to $1.4trn last year. Clearly, with stock and housing markets looking increasingly risky, US investors seem happy to prioritise ‘return of capital’ versus ‘return on capital’.
Helping you navigate the new normal