‘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.’
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China moves to protect dollar assets
State academy says it may press for specific steps at G-20 summit
Bloomberg
26 March 2009
(BEIJING) China’s leaders may press at the Group of 20 summit for specific steps to protect its more than US$1 trillion of dollar assets as US fiscal policies risk sparking a ‘currency war’, an official at a state academy said.
The dollar weakened after the Federal Reserve said on March 18 that it would buy as much as US$300 billion of Treasuries and the US this week outlined plans to buy as much as US$1 trillion of illiquid bank assets.
US 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 on Tuesday. ‘Chinese leaders are likely to articulate their concern to their US 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 US$787 billion stimulus package and a deficit this year forecast to reach US$1.5 trillion. China’s President Hu Jintao is due to meet him 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 per cent in yuan terms this year, according to Merrill Lynch & Co’s US Treasury Master index.
Demand for the relative safety of Treasuries has been supported in the past two years as finance companies reported US$1.2 trillion in credit losses. China boosted holdings of government debt as it has lost more than US$5 billion from investing US$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 on Monday that China would 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, Mr. Li said.
CASS is a government-backed research agency that advises policy makers. Mr. Li, the deputy director of the CASS Institute of World Economics and Politics in Beijing, said that he was previously involved in China’s planning for G-20 meetings.
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. Mr. Zhou’s article was posted on the central bank’s website on Monday.
About US$1-1.2 trillion of China’s foreign-exchange reserves, the world’s biggest, are invested in US-dollar assets, Mr. Li said, without citing a source. China’s Treasury holdings climbed 46 per cent in 2008 and now stand at about US$740 billion, according to US government data.
Mr. Li, too, described China as a ‘hostage’. ‘Previously, Chinese officials and academics always felt they had the upper hand psychologically in negotiating with the US, as they could easily threaten not to buy US Treasuries anymore,’ said Mr. 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 US budget deficit in half in four years.
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