China has misgivings about U.S. debt

Showing China’s growing economic muscle, the nation’s premier Friday expressed concerns about the stability of U.S. government bonds in Chinese hands and urged Washington to provide assurances to its largest foreign creditor.

“To be honest, we are a little bit worried,” Wen Jiabao said at the closing news 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.”

Analysts said that Wen’s concerns were natural, given that China holds roughly $1 trillion of U.S. Treasury and other government-backed bonds, and that Washington is now looking to borrow record sums to try to dig out of the recession.

Still, his surprisingly candid comments reflected Beijing’s increasing confidence and assertiveness in a global economy in which the communist nation is banker to the world’s richest country.

His words would not have been lost on Washington. The White House is counting on China to continue holding American debt and making future purchases to support President Obama’s $787-billion economic stimulus plan. China’s big appetite for Treasury issues has helped keep U.S. interest rates low and thus supplied cheap credit for Americans to buy homes and other goods.


Now, the U.S. needs China to continue bankrolling its spending to help it pull out of the worst economic downturn in decades, even as China needs the U.S. to buy its manufactured goods to keep people employed.

Wen also made it clear that China would not be bullied into adjusting its currency value. U.S. manufacturers and lawmakers have long complained that the artificially low yuan gives Chinese exporters an unfair trade advantage.

“No country in the world has the right to put pressure on the devaluation or appreciation of the Chinese currency,” Wen said.

Analysts doubted that Wen’s remarks were impromptu. Rather, they were probably intended in part to send a message -- perhaps pointedly to Americans -- about just how reliant they are 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 in London.

Wen spoke in advance of a summit of the Group of 20 major nations next month in which China may play an influential role in discussion of a coordinated stimulus plan and other strategies to fight the economic crisis. The world’s third-largest economy, China hasn’t escaped the global financial turmoil. Still, it remains the fastest-growing among major powers. Wen said Beijing was prepared to plow more money into its previously announced $586-billion domestic stimulus plan.

U.S. Treasuries stumbled early Friday after Wen expressed nervousness about the prospects of U.S. debt. But buyers quickly returned to the market, which has been stable in recent weeks despite Uncle Sam’s massive borrowing binge.

White House and Treasury officials sought to ease Chinese concerns and reassure investors.

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

In a visit to China last month, Secretary of State Hillary Rodham Clinton likewise tried to assure Beijing that U.S. assets remained a reliable investment.

Beijing has not given indications of any major shift in its current investments or future buying plans, although China is expected to gradually diversify its holdings. About two-thirds of China’s foreign reserves, accumulated from the nation’s trade surplus, are estimated to be held in U.S.-denominated assets. To a large degree, though, China’s hands are tied. Any big withdrawals or sharp declines in purchasing could seriously disrupt global markets and lower the value of China’s own holdings.

Still, Chinese policymakers and scholars increasingly have raised concerns about putting too much of China’s wealth in one basket -- and a rickety one at that. Some have urged more investment in tangible assets such as natural resources and technology and less in U.S. government bonds. Their view is that these securities are susceptible to a large drop in value because of the risks of a falling dollar or rising inflation as Washington prints more money to support its spending.

“I think it can’t be more natural for Premier Wen to feel worried,” said Zhao Xijun, professor of finance at Beijing’s Renmin University of China. “All the Chinese citizens will also share such concerns about our country’s assets under the current situation of this financial crisis.”

China’s response to the global economic crisis was a dominant theme during the meeting of the National People’s Congress, the legislative body controlled by the Communist Party. Despite a record fall in Chinese exports last month and a sharp deceleration of economic growth, Wen told foreign journalists Friday that he was hopeful China would emerge from the global crisis “at an early date.”

He said Beijing was prepared to add to its stimulus plan if it didn’t get China’s economy moving. Statistics released this week suggest that government spending on infrastructure and other projects -- plus aggressive lending by Chinese banks, which are relatively healthy compared with Western institutions -- may be starting to take effect as capital investment picked up.

“We have our plans ready to tackle even more difficult times,” Wen said. “At any time we can introduce new stimulus policies.”

China’s role looms large because it is one of the globe’s few major economies that are projected to grow this year. In recent years, the U.S. and, secondarily, China have propelled world economic growth. But with the U.S. in a deep downturn, and Japan and Europe also contracting, people are increasingly looking to China to help spark a recovery.

Last week, markets rose on word that Beijing might beef up its stimulus plan, only to fall back after Wen did not announce an increase during the opening of the legislative session. On Friday, Wen said that “rumors and misunderstandings set the world stock market on a roller-coaster ride.”

Journalists pressed the premier on his projections that China will achieve economic growth of 8% this year, a figure many economists call overly optimistic. Under questioning, Wen said it was more of a “goal” than an expectation. In 2007, China’s economy expanded 13%. That fell to an annualized rate of 6.8% in the fourth quarter of last year.

“I must admit it will be difficult to reach this goal . . . but this goal is an indication of the government’s confidence,” he said. “Setting the goal is like setting a compass so that you know which way the ship is heading.”