Premier's tough talk aside, China's fortunes tied to U.S.

03/13/2009 3:59 PM

04/24/2009 2:38 PM

WASHINGTON — The Chinese prime minister's blunt warning on Friday that he fears that his nation's investments in U.S. financial assets may be endangered signals both a need to distract attention from troubles at home and how interrelated the two giant economies have become, analysts said.

Prime Minister Wen Jiabao got the attention of Wall Street and Washington when he said during a news conference that his nation had "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."

China holds more than $1 trillion in U.S. government debt. Much of its vast foreign currency reserves are in U.S. dollars. If the dollar collapsed or U.S. inflation spiked, the value of those assets could decline sharply. Those scenarios seem highly unlikely but aren't impossible.

The White House fired back at Wen, with spokesman Robert Gibbs noting in his daily briefing that the Obama administration's aggressive actions to right the listing economy help both nations.

"I think the best thing we can do to assure anybody in Washington, America or throughout the world that we're serious is to pass the president's budget and put ourselves back on the path towards fiscal sustainability and fiscal responsibility," Gibbs said. He added that there's "no safer investment in the world than in the United States."

Prime Minister Wen's comments were surprising because the Obama administration has repeatedly praised China for also undertaking a big fiscal stimulus program to spark economic activity amid a downturn.

Why the sudden tough talk from China? Experts suggested that Chinese leaders are feeling the heat at home as the nation's blistering economic growth rate has slowed sharply because of the global downturn.

"They want to keep alive the idea that this problem is a foreign problem, thrust upon them," said Albert Keidel, a China expert at the Carnegie Endowment for International Peace and a longtime former China hand at the Treasury Department.

The global economic crisis has caused rising unemployment in China, a nation that's become accustomed to the double-digit economic growth of recent years. Even before the slowdown, the Chinese government, which isn't democratically elected, confronted tens of thousands of annual incidents of civil unrest.

"I think they are very sensitive to domestic consumption of the idea that the government is not doing the job in terms of solving the problems of unemployment," Keidel said.

Wen's comments may also reflect concerns that the Obama administration has failed to present a credible fix for U.S. banks.

"I think they're clearly sending a signal to the U.S. that they're very concerned with how we're managing the (economic) crisis," said Steven Schrage, the director of the international business program at the Center for Strategic and International Studies. "I think they're also very concerned that this could lead to the helicopter jump of money generation, more cash and inflation. As a way out of the huge fiscal problems that we're going to be spending huge amounts . . . which could weaken the value of the U.S. Treasuries they own."

Schrage was referring to infamous comments made by Ben Bernanke, before he became chairman of the Federal Reserve, that in the event of a deep crisis the Fed could always shower money on the nation from helicopters.

Still, Wen's criticism reflects a misunderstanding of China's own risks. In questioning the U.S. ability to make good on its debts, China threatens to undermine the value of the very assets it's holding.

"In a formal sense, China has lent money to the United States because they bought our Treasury paper . . . but in reality China is holding its international reserves, its international cash, in the safest place possible because that is in its best interests," Keidel said of China's dollar reserves. "The U.S. has a long track record of financial responsibility to guard against the kind of inflation that would threaten" China's holdings.

The flap over Wen's remarks also underscores how interconnected the world's two economic engines have become.

"It shows us how interlinked our economies are and long term, if China did start selling Treasuries, it could be hurting itself, since the value of the rest of the Treasuries could go down," Schrage said. "We're really in the same boat on many of these issues."

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