China Holds The Cards
by Alex Saitta
March 13, 2009
Let me tell you what is going on behind the scenes here before you read this article from CNNmoney.com.
Reading my previous write-up, The Four Phases of an Econonic Decline
, phase four is the U.S. government for years has been bringing in only this, spending all that and borrowing the difference. As long as foreign investors continue to lend the U.S. money (i.e., buy U.S. government bonds), that will keep interest rates down and the economic recovery should start in the second half of the year.
If foreign lenders like China start worrying about being paid back or the U.S. devalues all the dollars China now holds (about $2 trillion), China will stop lending new money to the U.S. and it will sell those dollars it currently owns. That will cause U.S., interest rates to rise and that will kill the recovery and ultimately lead to an economic collapse.
With all the printing of money the Federal Reserve is doing and all the borrowing our President and Congress is doing, China is getting concerned about U.S. inflation and the dollar falling in value on the foreign exchange market.
I suspect China has been privately telling U.S. officials for months they are concerned with all the U.S. spending and borrowing. Evidently, the new administration is not listening, because Nancy Pelosi is now pushing for a second stimulus and even more spending/ borrowing.
Since Washington didn't get the first message, China is now going public telling the world and the bond market, if the U.S. doesn't stop the spending/ printing and devaluing of the U.S. currency, China will stop lending the U.S. government new money and will sell the the U.S. bonds it already owns.
The bottom line is the U.S. government spends way more than it brings it. It is dependent on China to lend it money. It also has to make sure China continues to hold on to the U.S. bonds and dollars China already owns. If China wants to flush the U.S. economy down the toliet, it can by refusing to lend any more money to the U.S. and by selling their U.S. bonds and dollars.
Sad to say, but like any borrower who gets in over their head, the U.S. is now at the mercy of lenders like China.
China worried about safety of U.S. debt Premier Wen says China's large stake in U.S. Treasurys could lose value from massive U.S. deficit spending.
CNNMoney.com March 13, 2009: 7:00 AM ET BEIJING (Reuters) -- Premier Wen Jiabao held out the prospect of extra stimulus spending if needed to hit China's 8% growth goal this year and called on Washington to ease worries Beijing has about the safety of its vast U.S. assets.
In his annual news conference ending the nine-day session of China's ceremonial parliament, Wen on Friday reaffirmed China's commitment to keeping the yuan broadly steady and noted that the currency, far from having depreciated, had been rising in value.
Wen, who fielded questions for well over two hours, said the 8% growth target was a measure of his government's confidence and a reflection of its commitment to keep raising living standards. But he said the task was not easy.
China to expand stimulus "I believe that there is indeed some difficulty in reaching this goal. But with effort it is possible," Wen said.
"Only when we have confidence can we have courage and strength, and only when we have courage and strength can we overcome difficulties," the avuncular Wen, 67, said.
The premier said Beijing expected to see results from President Barack Obama's economic recovery plan but expressed concern that massive U.S. deficit spending and near-zero interest rates would erode the value of China's huge U.S. bond holdings.
China is the biggest holder of U.S. government debt and has invested an estimated 70% of its $2 trillion stockpile of foreign exchange reserves, the world's largest, in dollar assets.
"We have lent a massive amount of capital to the United States, and of course we are concerned about the security of our assets. To speak truthfully, I do indeed have some worries.
"I would like, through you, to once again request America to maintain their creditworthiness, keep their promise and guarantee the safety of Chinese assets," Wen said.
U.S. Secretary of State Hillary Clinton voiced her appreciation during a visit to Beijing last month of China's continuing "well-grounded confidence" in U.S. Treasuries.
Any big switch by Beijing out of U.S. Treasury bonds would drive prices lower, inflicting the very losses Wen fears. Still, his remarks, along with the lure of surging share prices, helped depress U.S. Treasuries in Asia.
China's central bank weighed in later with criticism of America's "inappropriate" economic policies, including low savings and high consumption, and said the global crisis had its roots in what it called an unchecked issuance of dollars.
Keeping some powder dry Wen was speaking at the end of a week in which China has reported a record decline in exports in February and record-low industrial production growth in the first two months of the year.
The weakness was partly offset by a surge in bank lending and strength in fixed-asset investment in response to the 4 trillion yuan ($585 billion) stimulus package that the government unveiled on Nov. 9 in a bid to secure 8% growth this year.
Wen disappointed investors a week ago, in his annual report to parliament, by failing to announce an increase in the size of the package, which aims to boost domestic demand and so take up the slack left by a free-fall in exports.
But he said markets had failed to grasp that the government was already providing relief over and above the stimulus: taxes would be cut by at least 500 billion yuan this year, pensions were going up and teachers' salaries would rise.
What's more, the government had kept some powder dry in case the global economic crisis, already the deepest since the 1930s, got even worse.
"We have prepared enough ammunition and we can launch new economic stimulus policies at any time," he said.
A tightly managed budget and years of rising tax revenues powered by strong economic growth meant the government could now afford to borrow to support the economy.
"We now have more leeway to run a larger fiscal deficit and take on more debt," Wen said. "The most direct, powerful and effective way to deal with the current financial crisis is to increase fiscal spending -- the quicker the better."
Steady as she goes Some officials and economists believe China should also try to quicken its economic recovery by pushing down the yuan, also known as the renminbi, to make the country's exports more competitive on global markets.
Switzerland's central bank on Thursday fanned speculation that a global round of competitive devaluations could be at hand by intervening to weaken the Swiss franc to help fight deflation.
Asked whether China would let its currency depreciate, Wen said this did not accord with the facts: because European and Asian currencies had fallen hard in the past year, the yuan had been gaining in value, putting pressure on China's exports.
Wen restated China's long-standing determination to keep the yuan basically steady and said Beijing alone would set the course of the currency. "No other country can put pressure on our country to depreciate or appreciate the renminbi."
Attaining 8% growth is the absolute priority of China's ruling Communist Party, which has staked its claim to legitimacy on ensuring ever-rising living standards and fears social unrest if growth slips below that threshold.
Twenty million migrant workers have already lost their jobs due to a collapse in exports and a slump in construction.
"The problem of unemployment is a very serious one," Wen said. The country was still stable, but he added: "Our government will take this a hundred times more seriously and never become complacent."