Official sounds alarm over US assets
Official sounds alarm over US assets
BEIJING - China should guard against risks from "excessive" holdings of US assets as Washington could pursue a policy to weaken the dollar, a senior currency regulator said in comments published on a website that briefly pushed the dollar lower.
But the comments by Guan Tao of the State Administration of Foreign Exchange (SAFE) were quickly removed from the website at his request. He told Reuters the comments had been made in private academic discussions and represented his personal view only.
"We must be alert to economic and political risks in excessive holdings of US dollar assets," Guan, head of the international payment department at SAFE, said in the article on the website of China Finance 40 Forum, a Beijing-based think tank of Chinese economists, bankers and officials.
"The United States has taken an expansionary fiscal and monetary policy to stimulate economic growth, and the United States may find it hard to resist the policy temptation of weakening the dollar abroad and pushing up inflation at home," he said.
The dollar, broadly lower on the day over market worries about the health of the US recovery, edged down slightly further after Guan's remarks. It hit a one-month low against a basket of currencies and the euro and a record low versus the Swiss franc.
Chinese officials have blamed ultra-loose US monetary policy for fueling global inflation and asset bubbles but they tend to be less vocal about China's huge holdings of US assets for fear of roiling the currency market.
At times though, top Chinese officials, including Premier Wen Jiabao, have publicly called on the US to ensure the safety of Chinese holdings of US assets.
One Chinese economist warned that China should stop buying US Treasury bonds and said the securities will be more risky because of the US' deficit.
Li Daokui, an adviser to China's central bank, said there is a risk the US may default on the debt. He called for the US to "stop playing with fire".
US economists, who spoke with China Daily, had a different take on this.
John Taylor, a professor of economics at Stanford University in Northern California, doesn't believe there is a default scenario.
"China should be thinking about other problems such as inflation, the exchange rate and the overheating of the economy," he said. "Decisions about foreign assets are largely dependent on their decisions on the exchange rate. That is the issue," said Taylor, adding the reason China buys US Treasury bonds is to prevent the exchange rate from appreciating so much.
The US federal budget deficit is expected to reach $1.4 trillion this year and stay high for several years. Congress is locked in tense negotiations over a deal to reduce the deficit and raise the $14.3 trillion debt limit under pressure from ratings agencies.
The deficit was built up in reaction to the global financial crisis, when the Federal Reserve also relaxed its monetary policy. Rates are virtually zero and the central bank has pumped cash into the economy by buying bonds, a program that is due to end this month.
China has never published its holdings of US Treasuries, but some economists have said as much as 70 percent of the country's foreign exchange reserves, which hit a record $3.05 trillion at the end of March, are parked in dollar assets.
China has been trying to diversify its reserves, the world's largest, away from the US dollar, but analysts say such diversification has been gradual.
Market conditions are favorable for China to forge ahead with market-based reforms of the yuan regime, Guan said, adding however that there is no basis for any sharp yuan rise.
"Recent improvements in the current account balance, especially in the trade balance, have shown that there is no basis for the yuan to appreciate significantly," Guan wrote.
As such, the timing is good now for China to improve the yuan exchange rate formation mechanism, he said without elaborating.
"The market conditions for two-way movement of the yuan exchange rate are gradually coming into existence," Guan said.
Separately, an adviser to the central bank called for yuan reforms in "a bold and decisive" fashion to reduce the central bank's massive foreign currency buying, which has pumped excessive cash into the economy and exacerbated inflation risk.
The central bank's dollar buying on the domestic market to keep the yuan exchange rate stable has been costly as such intervention fuels price rises, Zhou Qiren, who is also a professor at Peking University, said in comments published in the Economic Observer newspaper.
The yuan has gained 5.33 percent since it was depegged from the dollar in June 2010, and 1.65 percent since the start of this year.
Fan Jishe, a professor of American studies with the Chinese Academy of Social Sciences, said China should take a cautious approach in increasing its holdings of US bonds because if the US does not approve of a new debt ceiling, it would trigger worries in China of its dollar assets.
"The recent decision of the Congress could result in a tremendous cash back-flow to the US due to the country needs more greenback to stimulate its economy and employment," said Fan.
"But on the other hand, this is not bad news to China, because the cash back-flow to the US will ease China's inflationary pressure and reduce the market instability caused by 'hot money'."
China Daily reporters Zhang Yuwei and Zhong Nan contributed to this story.
Reuters
