Sunday, March 15, 2009

China's holdings of U.S. debt

Chinese Premier Wen Jiabao has expressed concerns that the U.S. government's attempts to stimulate economic activity may result in a reduction in the value of U.S. Treasury bonds, as the U.S. dollar weakens and U.S. interest rates rise. The Wall Street Journal reports on the U.S. government's response.

U.S. Insists China Fears Over Debt Unfounded By ANDREW BATSON, ANDREW BROWNE and MICHAEL M. PHILLIPS, Wall Street Journal, March 13, 2009. The Obama administration rejected China's concerns that its vast holdings of U.S. assets might be unsafe, in an unusual diplomatic exchange that underscored the global importance and the potential fragility of the Sino-U.S. economic relationship.In a coordinated response to blunt comments from ChinesePremier Wen Jiabao, White House officials said Friday that Mr. Obama intends to return the country to fiscal prudence once the crisis passes.

"There's no safer investment in the world than in the United States," said presidential spokesman Robert Gibbs.

That view was reiterated by the president's chief economic adviser, Lawrence Summers, who defended record U.S. deficit spending as a salve to the nation's economic woes. "If you don't prime the pump and you allow the processes of decay and decline and de-leveraging to continue, it's much more costly to do it later," he said.

The U.S. offensive came after Mr. Wen said earlier Friday in Beijing that China is worried about its huge stock of U.S. Treasury securities, an ominous warning given U.S. reliance on Chinese borrowing.

"We have lent a huge amount of money to the U.S., so of course we are concerned about the safety of our assets," Mr. Wen said in response to a question at his annual news conference.

"Frankly speaking, I do have some worries."....

Mr. Wen's public airing of his concerns -- and the U.S. government's fast response -- highlight China's extraordinary role in the U.S. economy as the largest holder of U.S. Treasury debt. For years, the U.S. has tried to strong-arm China into allowing the yuan to rise and liberalizing its financial system. But in the last year, Beijing has become increasingly vocal about what it sees as U.S. economic mismanagement making U.S. investments riskier....

The premier's comments were unusually pointed and raised the possibility that Beijing's appetite for U.S. debt could wane. In the worst-case scenario, a significant new aversion to U.S. investments could drive down the dollar and drive up interest rates, worsening the U.S. recession. Mr. Wen indicated China wouldn't be rash in making changes to its $1.946 trillion stockpile of foreign reserves. While China is looking out for its own interests, it will "at the same time also take international financial stability into consideration, because the two are inter-related," he said......

In September, China surpassed Japan as the largest foreign holder of U.S. Treasury debt. As of December, it owned $727.4 billion in such securities, according to the latest Treasury Department data. That marked a 52% increase from a year earlier, according to the Treasury, whose figures are thought to understate China's stock of U.S. government securities.

China also has limited options for its investments-outside the U.S., there aren't many other assets that can soak up the amount of capital it needs to invest.....

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