Friday, March 13, 2009

Premier Wen Speaks Out on US Reserves

China's attitude towards unquestioningly fueling America's debt by buying US Treasury Bonds is changing. As I chronicled a few days ago, in less than a month a lot has changed on this front.

Yesterday, the trend that I'd noticed continued to the top of China's hierarchy: Premier Wen Jiabao voiced his concerns about the security of China's partnering with the United States.

From The Los Angeles Times:

Photo from Bloomberg

Reporting from Shanghai and Beijing -- Chinese Premier Wen Jiabao voiced concerns today about the security of China's massive investments in U.S. government debt, even as he expressed confidence in the economic leadership of President Obama.

"To be honest, we are a little bit worried," Wen said, speaking at the closing press conference of China's annual legislative session.

"We have loaned huge amounts of money to the United States, so of course, we have to be concerned. . . . We hope the United States honors its word and ensures the safety of Chinese assets."

China is America's biggest foreign creditor. About half of China's estimated $2 trillion of foreign exchange reserves, the largest in the world, are invested in U.S. Treasury and other government-backed bonds. China's continued holdings and future purchases of American debt are seen as an important part of financing Obama's $787-billion economic stimulus plan.

Wen's comments, coming after a string of otherwise upbeat pronouncements about China's own economic prospects, were unusual in that he has rarely spoken up on the issue, nor in such frank terms. Analysts said they doubted the remarks were impromptu; rather, they may have been intended in part to send a message, perhaps to Americans in particular, about just how much they are reliant on the Chinese for their economic security.

"I suppose you could kind of view it as a shot across the bow," said Mark Williams, Asia economist at Capital Economics Ltd. in London.

Read On
Knowing how vital China is to America's economic and financial health, the Obama administration had a quick response attempting to quell Premier Wen's concerns.

From Bloomberg:

Photo from Politico

March 13 (Bloomberg) -- The Obama administration sought to ease Chinese Premier Wen Jiabao’s concern about the security of his country’s investments in U.S. government debt, reiterating pledges to cut the budget deficit in half in four years.

“There’s no safer investment in the world than in the United States,” White House Press Secretary Robert Gibbs said today.

Wen earlier said that China, the U.S. government’s largest creditor, is “worried” about its holdings of Treasuries and wants assurances that the investment is safe. “I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets,” he said at a press briefing in Beijing.

President Barack Obama is relying on China to sustain buying of Treasuries amid record amounts of U.S. debt sales to fund a $787 billion stimulus package and a deficit this year forecast to reach $1.5 trillion. Investors abroad own almost half of all U.S. debt outstanding, and China last year overtook Japan as the biggest foreign buyer.

Read On
It's probably too early to say that China is going to stop buying US treasuries, but the rhetoric is certainly heating up.

But as the anonymous poster pointed out in my last post on this matter and the China/America (Chimerica) relationship I explored a couple a couple weeks ago, it is unlikely that China is going to do anything too severe to rock the boat. (Yes, the boat metaphor here is a double entendre.)

China needs the US as much as the US needs China.

Saying that, it seems reasonable to me that China would be concerned about its investment in America. The US has chosen to fight its debt problem with truckloads more debt. The US is betting its future on the trillions its hoping will somehow restore its economy.

China, in my opinion, should be questioning whether the US is in fact helping itself with all of the mountains of debt its burdening itself with.

As an American citizen, I'm gravely concerned about the health of my home country and the path its heading down.


Mark said...

Here's some good analysis on this back-and-forth:

Thomas said...

As long as you keep buying lots of grapefruit imported from the US, you are doing your part to reduce both the US trade deficit and China's surplus... ;-)

Anonymous said...

China should be worried about their dangerous over investment in US Treasury obligations. Washington ’s long-term choice is either repudiation or monetization. For monetization to be effective, the depreciation in the dollar would have to be substantial and this in turn would dramatically raise prices of imports for American consumers which would mean a tremendous drop in foreign imports. Debt monetization would cause more disruption to exporting nations than selective repudiation of Treasury debt.

Washington has bailed out the banks, Wall Street & their Washington special interests and much of the cost is added to the national debt to by paid by this and future generations while real estate and investments continue to fall. Find out what a growing repudiate the debt movement could mean for treasury bonds, the dollar, gold and the stock market.

The Campaign to Cancel the Washington National Debt By 12/22/2013 Constitutional Amendment is starting now in the U.S. See:
Ron Holland