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China’s Leader Says He Is ‘Worried’ Over U.S. Treasuries

 

BEIJING — The Chinese premier Wen Jiabao expressed concern on Friday about the safety of China’s $1 trillion investment in American government debt, the world’s largest such holding, and urged the Obama administration to provide assurances that its investment would keep its value in the face of a global financial crisis. ...

“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,” Mr. Wen said. “We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.”

He called on the United States to “maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”

Mr. Wen raised the concerns at a session in which he touted China’s comparatively healthy economy and said that his government would take whatever steps were needed to end the country’s economic slump. He also predicted that the world economy would improve in 2010.

... China has the world’s largest reserves of foreign exchange, estimated at $2 trillion, the product of years of double-digit growth.

Economists say half of that money has been invested in United States Treasury notes and other government-backed debt. Some has also been deployed in major investment projects intended to prop up flagging growth at home.

The Chinese government faces a difficult dilemma. If the United States government borrows less and engages in less fiscal stimulus, this could help prevent interest rates from rising in the United States and would preserve the value of China’s existing bond holdings.

But less government spending in the United States could also mean a slower recovery for the American economy and reduced American demand for Chinese goods. The United States imported 17.4 percent less from China in the first two months of this year compared to the same period last year, contributing to a record drop in Chinese exports that is braking the entire Chinese economy.

The bulk of China’s investment in the United States consists of bonds issued by the Treasury and government-sponsored enterprises and purchased by the State Administration of Foreign Exchange, which is part of the People’s Bank of China.

But some of China’s most controversial investments on the other side of the Pacific Ocean, judging by comments in Internet chat rooms, have been the purchases of shares in American financial institutions in 2007 by the China Investment Corporation, the country’s sovereign wealth fund, which was bankrolled nearly two years ago with $200 billion from its foreign reserves.

The China Investment Corporation’s most-publicized deal came in June 2007, when it spent $3 billion on shares of the Blackstone Group, a big private-equity fund, paying $29.605 a share. The stock closed on Thursday at $6.10, for a loss of 80 percent, or $2.4 billion of the initial investment.

During her visit to China last month, Secretary of State Hillary Rodham Clinton publicly assured Beijing that its American holdings remained a reliable investment. On Friday, Mr. Wen neither detailed his concerns about their safety nor said what sorts of new assurances he expected the United States to deliver.

But economists have cited several possible threats, led by the prospect that the dollar’s value will depreciate over time, lowering the value of China’s holdings.

“In the short run, the dollar is appreciating” because global investors see the American currency as a safe haven at a time of crisis, Bai Chong-En, who heads the economics department at Tsinghua University in Beijing, said in a telephone interview. “But we don’t know what’s going to happen in the long run. If the American stimulus package is financed mainly by borrowing, then that may affect the future value of Treasury securities.”

Some specialists also say that high inflation could erode the dollar’s value. Finally, some believe that China’s investment in American debt is now so vast that, should it need foreign exchange in some emergency, it would be unable to sell its Treasury securities without flooding the market and driving down their price.

“The only possibility, really, is that China will have to hold these bonds until maturity,” said Shen Minggao, the chief economist at Caijing, a Beijing-based business magazine. “If you start to sell those bonds, the market may collapse.”

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