Wen puts US honor on the debt line By Olivia Chung
HONG KONG - Chinese Premier Wen Jiabao, faced with growing concern that United
States efforts to stem the financial crisis will hit the value of China's vast
holdings of US debt, used the world's press on Friday to demand that the US
honor its promises.
Wen told a press conference after the conclusion of a two-week meeting of the
country's legislators that he was "a little bit worried" about the safety of
Chinese assets in the US, and called on the US "to maintain its good credit, to
honor its promises and to guarantee the safety of China's assets." He also
reiterated that other countries had no right to push China into appreciating
its currency, the yuan.
Various efforts by the US to resolve the country's financial crisis
by selling ever more debt to pump money into the financial system are raising
concern that this will drive up inflation and pull down the value of the US
dollar, which would cut the value of debt held by China, the largest creditor
of the US.
"We are very concerned about the economic developments in the US economy," Wen
said. "The US administration of President Barack Obama has taken a series of
measures to counter the financial crisis. We look forward to the effectiveness
of those measures."
Wen called on the US government to ensure that the value of Chinese assets in
the US is maintained amid the crisis.
"We have lent a huge amount of money to the United States and of course we're
concerned about the security of our assets and, to be honest, I am a little bit
worried," Wen said in Beijing after conclusion of the second session of the
11th National People's Congress (NPC). "That's why here I would like to urge
the US to keep its commitment and promise to ensure the safety of Chinese
About US$1 trillion of China's foreign exchange reserves, which increased 27%
last year to $1.95 trillion, is invested in US government bonds and other
securities. China held $696.2 billion in US government bonds as of December, up
from $681.9 billion a month earlier, according to the US Treasury international
capital flow report released on February 18.
China has accelerated its purchases of Treasury debt since August 2008, when
holdings grew by $23.7 billion month-on-month to US$541.4 billion. By
September, it had holdings of Treasury debt worth $585 billion, more than
Japan, previously the top holder of US Treasuries. In August 2008, Japan cut
its holdings to $573 billion from $586 billion.
As the global financial crisis sends asset values plunging, mainland leaders
are under growing pressure at home to diversify the country's foreign exchange
In December at the fifth Sino-US Strategic Economic Dialogue in Beijing, Vice
Premier Wang Qishan urged the US to adopt every measure necessary to stabilize
its economy and ensure the safety of China's assets and investments in the
Pauline Loong, senior vice president in charge of China policy and risk
research at CIMB-GK Securities (HK) Ltd, said she did not think China would
dump its dollar holdings .
"I cannot see Beijing dumping its dollar holdings," she said. "If the market
thought there was anything to the talk, there would be a scramble to dump. The
result would be exactly what Beijing would not want to see: a massive fall in
the value of its dollar holdings. Also, Beijing has few alternatives. What is
it going to switch into? There are few markets that are as deep and liquid as
the dollar - and to park $2 trillion in exchange reserves, you can't be
"The fact that Premier Wen talks about being worried about the value of the
country's dollar holdings is a good sign. If he is going to dump the dollar, he
is not going to talk about it," she said.
Even so, a two-day gain in Treasuries juddered to a hold on Friday, with the
yield on the benchmark 10-year note rising six basis points to 2.91% as the
price of the 2.75% security due in February 2019 fell $4.69 per $1,000 face
amount, to 98 19/32 in early London trade, according to Bloomberg.
Wen reiterated China's principle of guaranteeing the "safety, liquidity and
good value" of its foreign exchange reserves and diversifying the investment of
"On the foreign reserves issue, the first consideration is our national
interest ... But we also have to consider the stability of the overall
international financial system, as the two factors are interlinked," Wen said.
"Currently, our reserves are generally safe."
Wen also ruled out any further strengthening of the Chinese currency in the
intermediate future. He said no country had the right to press for either the
devaluation or appreciation of the yuan. A stronger yuan would drive up the
price of exports to the US while making it cheaper for US goods to be imported
The yuan "has appreciated since the European and Asian currencies have dropped
in recent year, in addition to the yuan's 21% appreciation against the dollar
since July 2007", he said.
Loong, however, said there was a risk of incorrectly interpreting such comments
as indicating policy was set in stone.
Governments everywhere, "not just in China, are devising strategies and coming
up with policies on the run. If economic data in the coming months surprise on
the upside or downside, then Beijing will need to revise policy," she said.
China, whose currency is not at present fully convertible into other
currencies, is moving to make it more fully used in international trade. Wen
said that a plan for the settlement of trade in yuan had been formulated and
would be carried out as quickly as possible once it was approved by the State
Council, or cabinet.
A pilot project involving yuan-denominated settlement of trade deals would
start from Hong Kong, Guo Qingping, assistant governor of the People's Bank of
China, or the central bank, said on Wednesday in Beijing.
Referring to China's ability to survive in the global downturn, Wen said the
country was fully prepared for even worse conditions and had long-term
preparations "with plenty of ammunition" to cope.
"We are ready to roll out new stimulus policies at any time," Wen said, without
giving details. China last November announced a 4 trillion yuan (US$585
billion) stimulus package to help boost the domestic economy as exports
Loong said the Chinese government would do whatever it took to support economic
growth, but timing remained a question.
"The 4 trillion yuan fiscal spending needs time to kick in and work its way
through to the economy. Beijing, we believe, will not fire until it can see the
white of the enemy's eyes. Why waste bullets?" she said.
"Any announcement of new stimulus money in the coming weeks as the market
awaits news of the first quarter of 2009 gross domestic product [GDP] numbers
is both good and bad news - good because it gives the government breathing
space to tackle the basic problems of the economy; bad because the government
clearly sees a need to prevent a seriously hard landing," Loong said.
Details of the package, including how much is actually new spending, are not
yet clear. Wen conceded that some projects in the stimulus package, such as
roads and railways, were included in the country's 11th five-year plan. Global
stock markets declined sharply at the start of the NPC meeting when Wen,
contrary to expectations, declined to announce any new stimulus funding.
China's stimulus package plan was not fully understood by the world, he said.
"Rumors and misunderstanding set the world stock market on a roller coaster
ride," he said.
Wen emphasized that although China would have difficulty in achieving its goal
of 8% economic growth this year, it would be possible with "considerable
efforts", given the advantages of a huge domestic market, a large amount of
labor and a sound and stable financial sector.
"With a 1.3 billion population ... China has a bigger market than those of the
Europe and the United States," Wen said.
Even so, confidence is what China needs most to carry out its all-around
economic stimulus package, he said.
"We have proposed a stimulus package only less than half a year after the
financial crisis began. To implement the plan, I still believe confidence is
still the first and foremost thing," Wen said.
Olivia Chung is a senior Asia Times Online reporter.