johnnymk

http://www.nytimes.com/2009/03/14/bu..._r=1&th&emc=th

BEIJING — China, the world’s biggest holder of United States government debt, expressed concern Friday about the safety of those assets as American deficits have ballooned with costly stimulus and bailout packages aimed at rescuing the economy.

The Chinese prime minister, Wen Jiabao, said the country was “worried” about its holdings of U.S. Treasuries and called on the United States to provide assurances that the investments were safe, and that China was watching United States economic developments very closely.

“President Obama and his new government have adopted a series of measures to deal with the financial crisis. We have expectations as to the effects of these measures,” Mr. Wen said at a news conference in Beijing after the final session of the National People’s Congress, the Chinese legislature.

“We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.”

China has the world’s largest reserves of foreign exchange thanks to years of double-digit growth in the years that preceded the financial crisis that began in the United States in 2007. Beijing has been deploying much of its reserves in increased purchases of U.S. Treasuries and the financing of major investment projects designed to prop up flagging growth at home.

Analysts estimate that nearly half of China’s $2 trillion in currency reserves are invested in U.S. Treasuries and notes issued by other government-affiliated agencies.

Those Chinese investments have helped assure the stability of the U.S. Treasury market despite the economic convulsions of the last year, and some economists have warned of alarming consequences should the Chinese investments stop propping up the market for American public-sector debt.

During her visit to China last month, Secretary of State Hillary Rodham Clinton sought to reassure Beijing that those holdings remained a reliable investment.

Mr. Wen sought added reassurances on that front on Friday, calling on the United States to “maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”

Mr. Wen did not specify China’s concerns about the safety of its investment in American debt. But some economists have cited fears that the dollar’s value will depreciate over time, lowering the value of China’s holdings.

“In the short run, the dollar is appreciating” because global investors see the American currency as a safe haven at a time of crisis, Bai Chong-En, who heads the economics department at Tsinghua University in Beijing, said in a telephone interview.

“But we don’t know what’s going to happen in the long run. If the American stimulus package is financed mainly by borrowing, then that may affect the future value of Treasury securities.”

Some experts also cite fears that inflation will erode the dollar’s value. And some believe that China’s investment in American debt is now so vast that, should it need foreign exchange in some future emergency, it would be unable to sell its Treasury securities without driving down their price.

“The only possibility, really, is that China will have to hold these bonds until maturity,” said Shen Minggao, the chief economist at Caijing, a Beijing-based business magazine. “If you start to sell those bonds, the market may collapse.”

At Friday’s news conference, Mr. Wen also stressed that China stood ready to expand its already sizeable stimulus measures if the global slowdown required extra action.

Beijing in November announced a stimulus package of 4 trillion yuan, or $585 billion, focused on infrastructure spending, and Mr. Wen said China had enough resources — “adequate ammunition,” is how he phrased it — to spend more in a bid to safeguard jobs.

Jobs, in particular, are a major concern for the Chinese authorities, who fear potential social unrest as millions of migrant workers’ jobs have fallen victim to the global slowdown.

VTGreg

Definitely scary stuff. I'm not sure that there was anything that Hillary could have said on her trip that would have assured the Chinese. With that said, the US has never missed a debt payment.

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zippyjuan

China could decide to buy fewer Treasuries in the future- which would mean higher interest rates in the US because they would have to go up to attract enough capital to fund our booming deficit. Would China start to dump the ones they own? Not likely. That would hurt their ability to maintian their fixed exchange rates (the reason they bought a lot of dollar assets is to not have to exchange the dollars the US spent on products from China and keep the exchange rate) which would cause the price of Chinese exports to go up and slow down their exports.

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