Daily Archives: August 23, 2011

Time to pay the piper: Who gets stuck with the bill?

Prior to his recent visit to China, Vice-president Joe Biden tried to assure investors that U.S. Treasury bonds are still a good investment, saying that the US administration “is deeply committed to maintaining the fundamentals of the US economy” to “ensure the safety, liquidity and value of US Treasury obligations for all of its investors”.

Good try, but the Chinese are not buying it, nor, it seems, is anyone else. The Federal Reserve has become of late the biggest buyer of treasury bonds, and Standard and Poor recently announced that they have downgraded the U.S. debt rating from AAA to AA+. Dollar denominated securities are now becoming a “hot potato” as loss of purchasing power of the dollar seems assured.

An August 19, 2011 article in China Daily titled, Experts urge China to trim US T-bond holdings, quotes both Chinese and American authorities and concludes thatChina should reduce its holdings of US Treasury bonds to protect the value of its massive foreign exchange reserves.” Here are some excerpts:

“China should move progressively to cut its holdings of US Treasury bonds and use it as leverage to ask Washington to further open its markets, including the high-technology sector, to Chinese investment,” Xiang Songzuo, deputy director of the Center for International Monetary Research at Renmin University of China, said at a forum.

“Washington should provide a guarantee on the safety of China’s assets,” while it is creating global inflationary pressure through quantitative easing to stimulate its economy, Xiang said

Zhu Chao, assistant dean of the School of Finance at the Capital University of Economics and Business, said Biden’s promises were more symbolic than meaningful.

Stephen Roach, the non-executive chairman of Morgan Stanley Asia, said that the US debt crisis has shaken China’s confidence in Washington but the pro-consumption shift in its economic structure will help reduce the pace of its foreign-exchange accumulation.

“The US debt crisis has taken a serious toll on China’s confidence in Washington’s economic stewardship,” Roach said in a research note.

“China is no longer willing to risk financial and economic stability on the basis of Washington’s hollow promises and tarnished economic stewardship.”

The situation suggests some major policy questions that could have far-reaching effects on the American economy and on the American middle-class. China has, up to now, been willing to accept America’s i.o.u.’s in exchange for all those computers, TVs, shoes, clothing, and other goodies that Americans have been gobbling up at bargain prices. Now the piper must be paid, one way or another. Will Washington “further open its markets, including the high-technology sector, to Chinese investment,” as the Chinese are demanding? Will the U.S. government allow Chinese companies to buy up American companies, real estate, and infrastructure?

You can’t blame the Chinese for wanting real value in return for what they have already delivered. The fault lies with the policies of the past 30 years that, in the guise of “free trade,” have promoted the interests of the few at the expense of the many.—t.h.g.