China to Continue Buying U.S. Debt

[Carlos Spicy Wiener]

BEIJING -- China will continue buying U.S. government debt while paying close attention to possible fluctuations in the value of those assets, a vice governor of Beijing's central bank said Monday.

Investing in U.S. Treasury bills is "an important component part of China's foreign currency reserve investments," People's Bank of China Vice Governor Hu Xiaolian said at a news conference on Monday.

"So as an important component we are naturally relatively concerned with the safety and profitability of U.S. government bonds," Hu said -- a statement apparently aimed at concerns that rising debt to fund Washington's stimulus package could spur inflation and weaken the dollar.

China is Washington's biggest foreign creditor, holding an estimated $1 trillion in U.S. government debt. A weaker dollar would erode the value of those assets.

Hu's comments follow remarks earlier this month from Chinese Premier Wen Jiabao that he was "a little bit worried" about China's holdings of U.S. government debt. Wen called on the U.S. to honor its commitments, remain credit-worthy, and ensure the safety of Chinese assets.

China's investments are likely to be a major topic of discussion when Chinese President Hu Jintao meets with President Barack Obama on the sidelines of an April 2 summit in London of the Group of 20 major economies called to discuss remedies for the global financial crisis.

The meeting will be the first face-to-face encounter between the two men, and a top Chinese diplomat appearing alongside Hu Xiaolian sought to set a positive tone for the talks.

China-U.S. relations have gotten off to an "excellent start" under Obama, Vice Foreign Minister He Yafei said, appearing to rule out any lasting damage from a confrontation earlier this month between Chinese boats and an unarmed U.S. Navy surveillance ship off China's southeastern coast.

China accused the USNS Impeccable ship of operating illegally within its exclusive economic zone, while the U.S. said the Chinese boats had acted dangerously in blocking its passage and later assigned a destroyer to escort the ship.

He said Hu and Obama planned to discuss the global economic crisis, bilateral ties, and regional and global issues such as plans by North Korea to launch missile and Iran's nuclear program.

Despite its massive holding of U.S. government debt, China has given no indication of any preferred changes to Washington's policies, and Hu, the central bank's vice governor -- who is not related to the president -- said China considered U.S. debt a good credit risk, even if market values fluctuate.

Analysts estimate China keeps nearly half of its $2 trillion in foreign currency reserves in U.S. Treasuries and notes issued by other government-affiliated agencies. That has sparked questions within China as to whether the government should continue to buy Treasuries, as well as debate on how Beijing might leverage that to boost its influence over the global financial system.

China's continued purchase of Treasuries helps fund U.S. deficit spending aimed at averting a lengthy recession and helps keeps interest rates low to permit U.S. banks to continue lending.

At April's London summit, leaders are expected to press for an overhaul of international financial institutions to help ward off future crises. That could include doubling the International Monetary Fund's budget to US$500 billion and giving more say to China.

Hu said China supports efforts by the IMF to come up with new ways of raising capital, possibly including the sale of bonds. If bonds were issued, China would "actively consider" buying them, Hu said.

[d_b_99]

This is good for the US economy - one of the main reasons why lowered interest rates has not resulted in greater availability of credit is that the banks just take their free money and buy t-bills because they offer higher interest. If China buys those t-bills instead, they will be taken up faster and banks will be forced to lend again to make money.

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This is a good thing?

[Expletive]

Yeeaaaa CHINA! Looks like it's time to learn Mandarin.