Asian debt withdrawal threat to US deficit
By Jenny Wiggins in New York

Economists fear that Asian investors, who are the largest foreign owners of
US Treasuries, may cut their holdings of US government debt, withdrawing a
key source of financing for America's large current account deficit.

The worries have been fuelled by recent sharp falls in the price of US
government debt.
Weakness in the US Treasury market could make Asian investors "less
willing" buyers of debt securities, said Marcel Kasumovich, head of G10
foreign exchange strategy at Merrill Lynch.
He said there had already been a "noticeable shift" downwards in the amount
of debt issued by mortgage financiers Freddie Mac and Fannie Mae being
bought by foreign investors.
Asian investors have piled into the US Treasury markets in recent years,
helping to push Treasury prices high and interest rates low. China, Japan,
South Korea and Hong Kong owned a combined total of about $696bn in
Treasuries at the end of June, up from $512bn in December 2001, according
to data from the US Treasury.
Asian countries use the income they receive from exporting goods to the US
to buy American assets, which helps keep their currencies weak compared
with the dollar. This helps keep the price of Asian goods down in the US. But in recent months, as investors have become more optimistic about an
economic recovery, they have begun to sell Treasury debt, sending
government bond prices down.
Political pressure on Asian governments to alter their exchange rates could
also prompt selling. The US Treasury would like Beijing to abandon its
fixed currency regime because it is concerned that China is keeping its
currency low to support exports.
However, if China and other Asian countries were to allow their currencies
to strengthen against the US dollar, they would have less need to own US
assets.
"It could mean Asia pulls out of US markets," said Ethan Harris, chief US
economist at Lehman Brothers.
If Asian countries were to reduce their holdings of American assets
heavily, they would remove a key source of finance for US investment spending.