Friday, April 3, 2009
China and the Dollar
"The Obama administration rejected China's concerns that its vast holdings of US assets might be unsafe in an unusual diplomatic exchange that underscored the global importance, as well as the potential fragility, of the Sino-US economic relationship. In a coordinated response to blunt comments from Chinese Premier Wen Jiabao, White House officials said Friday that Mr. Obama intends to return the country to fiscal prudence once the crisis passes. 'There's no safer investment in the world than in the United States,' said presidential spokeman Robert Gibbs. That view was reiterated by the president's chief economic adviser, Lawrence Summers, who defended record US deficit spending as a salve to the nation's economic woes. 'If you don't prime the pump and you allow the process of decay and decline to continue, it's much more costly to do it later, he said. ... 'We have lent a huge amount to the US, so of course we are concerned about the safety of our assets,' Mr. Wen said in response to a question as his annual news conference. 'Frankly speaking, I do have some worries.' ... Wen's public airing of his concerns--and the US government's fast response--highlight China's extraordinary role in the US economy as the largest holder of US Treasury debt. For years, the US has tried to strongarm China into allowing the yuan to rise and liberalizing its financial system. But in the last year, Beijing has become increasingly vocal about what it sees as US economic mismanagement, voicing concern that growing debt levels could make US investments riskier. ... The premier's comments were unusually pointed and raised the possibility that Beijing's appetite for US debt could wane. ... Wen and China alone would decide where the yuan goes from here. 'No country can pressure us to appreciate or depreciate' the currency, he said. ... China also has limited options for its investments-outside the US, there aren't many other assets that can soak up the amount of capital it needs to invest", my emphasis, Andrew Batson, Andrew Browne and Michael Phillips at the WSJ, 14 March 2009.
Does this mean Obama admits his current course is imprudent? Nonsense. China can always buy gold. The US must be driving China crazy. Suppose China let the yuan rise. To do so, it could simply stop buying Treasuries. Would Uncle Sam want that and have interest rates rise? Poor China to have a schizophrenic trade partner.