Monday, April 27, 2009

China 'worried' about safety of US assets

by Tania Branigan in Beijing and Simon Tisdall, The Guardian, Saturday 14 March 2009

Wen Jiabao, China's prime minister, issued a veiled warning to America yesterday to maintain control over its economy in the latest sign the global economic crisis is testing the most important bilateral relationship in the world.

In forthright remarks on the intertwined nature of US and Chinese finances, Wen told a news conference he was "worried" about Beijing's holdings of American government debt. Analysts believe China has $1trn (£716bn) of US treasury bills in its coffers, implying a delicate balance between two powers whose fortunes are interlinked.

Speaking at an annual press conference at the end of China's rubber-stamp parliament, Wen said: "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.

"We have lent a huge amount of money to the US. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried." In rare comments on another country's financial health, he added: "I'd like to take this opportunity here to implore the United States ... to honour its words, stay a credible nation and ensure the safety of Chinese assets."

Economists said Beijing was worried Washington would overspend as it tries to get the economy moving, eroding the value of the dollar. Wen's intervention came as finance ministers and central bankers meet in Britain to lay the groundwork for next month's G20 summit.

Wen's comments were the latest in a testy exchange over economic policy, and also followed a naval spat between the two countries as America accused five Chinese ships of harassing one of its surveillance vessels in international waters in the South China Sea. Beijing said the US vessel was operating illegally, but the Pentagon has dispatched a destroyer to the region to protect the American ship.

In another potential irritant for relations, the family of one of China's most prominent dissidents surfaced in America after being spirited out of China. Geng He, wife of Gao Zhisheng, a lawyer whose causes included disgruntled investors and the outlawed Falun Gong sect, made the trip in January, and flew to the US on Tuesday. She paid human traffickers to smuggle her and her two children across south-east Asia by motorbike.

China and America have moved in recent years to keep dealings cordial, and relations have improved. They have worked together on international problems such as North Korea and Iran, and America has softened its criticism of China's human rights record: there was little mention of Tibet in Washington this week during the anniversary of last year's unrest.

Underlying frictions persist over Taiwan, China's military build-up and China's interests in Africa, particularly Sudan. Then there is the economic dimension.

There was friction in January when Timothy Geithner, the US treasury secretary, said Obama believed China was manipulating its currency, but the US administration subsequently rowed back.

Analysts said Wen's remarks were a coded message to Washington to exercise caution. "China is telling the US to be careful, not to overspend and keep an eye on the dollar," Kelvin Lau, regional economist at Standard Chartered in Hong Kong, told the Associated Press.

Washington needs to continue selling treasury notes to fund its $787bn stimulus package. Last month Hillary Clinton, the secretary of state, urged China to maintain its stock as she visited the country.

"They are worried about forever rising deficits, which may devalue treasuries by pushing interest rates higher," JP Morgan economist Frank Gong told Reuters. Beijing is aware that abrupt action would punish the dollar, damaging the value of existing holdings and affecting the sale of goods to its biggest export market.

Turning to the wider economic picture, Wen said China would find it difficult, but possible, to reach its 8% growth target. Independent economists suggest the figure could be as low as 5% - enviable to most major economies, but potentially too low to keep unemployment down.

China's authorities are worried about the prospect of millions of laid-off workers returning to the disgruntled provinces.