Interest rates: "Made In China"

What has America's voracious appetite for all things "Made In China" meant for U.S. home buyers? A 0.5 to 1 percent discount on their mortgage interest rate, according to academics at the University of California, Berkeley's Haas School of Business.

China has purposely undervalued its currency by investing in U.S. bonds and mortgage-backed securities (MBS), say Ashok Bardhan and Dwight Jaffee, authors of a study out today. That (and the lower cost of labor) has helped make Chinese goods affordable to Americans while keeping interest rates low. But it also puts the U.S. in a vulnerable position should China suddenly decide it's too reliant on the dollar and that it needs to diversify into euro-backed assets.   

Chinese investors hold about 9 percent of U.S. Treasuries, 5 percent of agency bonds and 3
percent of agency MBS, the study estimates. Throw in Japan and other countries in the region, and Asian investors hold 32 percent of U.S. Treasuries, 13 percent of agency bonds, and 6 percent of agency MBS (Agency bonds are debt issued by the Federal Home Loan Banks, Freddie Mac, and Fannie Mae among others, and agency MBS are securities backed by home loans securitized by Fannie, Freddie and Ginnie Mae.)

"If Asian holdings of U.S. Treasuries simply reverted back to their share as of year-end 2000, which is certainly a possibility, this would mean that about 17 percent of the total outstanding U.S. Treasury securities would be placed on the market for sale," the authors say. Same deal with agency securities -- about 8 percent would be on the market if Asian investors suddenly went back to 2000 levels.

Interest rates would have nowhere to go but up. The prospect was reason enough for HUD Secretary Alphonso Jackson to get on a plane to Beijing this summer, and plead with the People's Republic of China to keep buying U.S. MBS. As much as Chinese officials might like to diversify and reduce their holdings of dollar-backed investments, they're in a little bit of a pickle, the study notes.

Pull out too abruptly, and the resulting run on the dollar will make it more costly for Americans to buy Chinese made goods, and devalue China's remaining dollar-based assets.

Whether they act abruptly or not, "It is inevitable that Chinese and other investors will eventually decide that the gains from a more diversified investment portfolio -- diversified outside of dollar assets -- outweigh the benefits of its export-driven growth policy, thus leading to a gradual increase in US interest rates," the authors said in a press release from the Mortgage Bankers Association announcing the study's release. 

That could prove costly to home buyers -- and Uncle Sam, which depends on foreign investors to finance the growing deficit.

All rights reserved. This content may not be used or reproduced in any manner whatsoever, in part or in whole, without written permission of Inman News. Use of this content without permission is a violation of federal copyright law.