China May Press G-20 to Guard Its U.S. Assets, Researcher Says
Li Yanping
The dollar weakened after the Federal Reserve said March 18 it would buy as much as $300 billion of Treasuries and the U.S. this week outlined plans to buy as much as $1 trillion of illiquid bank assets.
U.S. purchases of Treasuries are “irresponsible” because they may weaken the dollar, Li Xiangyang, of the government- backed Chinese Academy of Social Sciences, told a forum in Beijing today. “Chinese leaders are likely to articulate their concern to their U.S. counterparts strongly and ask for specific measures.”
President Barack Obama is relying on China to continue its purchases of Treasuries as the government seeks to fund a $787 billion stimulus package and a deficit this year forecast to reach $1.5 trillion. China’s President Hu Jintao is due to meet with his U.S. counterpart at the G-20 summit in London next week.
“China is a hostage,” said Andy Xie, an independent Shanghai-based analyst who was formerly Morgan Stanley’s chief Asia economist. “China is America’s bank and America basically says there’s nothing you can do to me. If I go down you don’t get paid.”
Treasuries have handed investors a loss of 1.6 percent in yuan terms this year, according to Merrill Lynch & Co.’s U.S. Treasury Master index.
Credit Losses
Demand for the relative safety of Treasuries has been supported in the past two years as finance companies reported $1.2 trillion in credit losses. China boosted holdings of government debt as it lost more than $5 billion from investing $10.5 billion of its reserves in New York-based Blackstone Group LP, Morgan Stanley and TPG Inc. since mid-2007.
Hu Xiaolian， the head of the nation’s currency regulator, said yesterday that China will continue to buy Treasuries and endorsed the dollar’s global role.
Fed purchases of Treasuries are “irresponsible” because of the dollar’s role as a global reserve currency and the possibility that other nations will devalue their currencies should the dollar keep falling, Li said.
CASS is a government-backed research agency that advises policy makers. Li, the deputy director of the CASS Institute of World Economics and Politics in Beijing, said he was previously involved in China’s planning for G-20 meetings.
Reserve Currency
His comments came after central bank Governor Zhou Xiaochuan urged the International Monetary Fund to work on creating a “super-sovereign reserve currency” that would be stable and independent of individual nations. Zhou’s article was posted on the central bank’s Web site yesterday.
About $1 trillion to $1.2 trillion of China’s foreign- exchange reserves, the world’s biggest, are invested in U.S.- dollar assets, Li said, without citing a source. China’s Treasury holdings climbed 46 percent in 2008 and now stand at about $740 billion, according to U.S. government data.
Li, too, described China as a “hostage.”
“Previously, Chinese officials and academics always felt they had the upper hand psychologically in negotiating with the U.S., as they could easily threaten not to buy U.S. Treasuries any more,” said Li. “Now, that bargaining chip has been taken away.”
The Obama administration sought this month to ease Chinese concern about the security of its investments, reiterating pledges to cut the U.S. budget deficit in half in four years.
China needs more concrete assurances, Li said, without adding what specific measures the U.S. could offer.
The size of China’s reserves makes it hard to diversify away from dollar assets without causing turbulence in the currency and commodity markets, Li said. The reserves “are such a big chunk that it’s too difficult to turn them around,” he said.
Premier Wen Jiabao called on March 13 for the U.S. “to honor its promises and to guarantee the safety of China’s assets”.
To contact the reporters on this story: Li Yanping in Beijing at yli16@bloomberg.net
Last Updated: March 24, 2009 09:44 EDT