A curious turn of phrase from Vice-Premier Wang Qishan during his opening speech at the latest bilateral strategic economic talks with his American counterpart U.S. Treasury Secretary Hank Paulson:
”I hope the United States will take all necessary measures to stabilize its economy and financial markets as soon as possible and to ensure the security of Chinese investments and interests in the United States.” (fuller reports from Xinhua here).
The first half of that is straightforward enough and could have come from any recent meeting of international leaders from the G-7 up. But to what does the second half refer? Investments by state agencies such as China Investment Corp. and state-controlled banks and other enterprises which have been battered by the fall in global equity markets? We noted yesterday that CIC had lost $6 billion on its stakes in two U.S. financial firms, Morgan Stanley and the Blackstone Group.
Or was Wang referring to the 60% of China’s $2 trillion of reserves that are held in dollar assets? A substantial share of those are U.S. Treasury bonds and debt issued by troubled U.S. mortgage lenders Freddie Mac and Fannie Mae, both now effectively under U.S. government control.
It is no secret that some top officials have been worried for a while that the dollar’s decline was eroding the value of those holdings and questioning whether it made sense for China to continue to increase them. Not that the dabbling in equity markets by way of diversification and to juice yields to offset that has necessarily turned out well in the circumstances (see CIC above).
However, with the U.S. having to fund an expensive bailout, and China being one of the primary surplus countries that will have to provide the cash, the internal debate about growing China’s dollar-denominated reserves will continue. China has little choice but to continue to fund America’s deficits if it wants to avoid global recession, but it also wants to avoid throwing good money after bad.
One sign of its willingness to get tougher with the U.S. over this is its willingness to let the yuan depreciate against the dollar over recent weeks, a move that helps China’s exporters even though it reverses Beijing’s compliance with the U.S.’s long standing pressure to get the yuan to rise against the dollar and to stop being what its American critics, including President-elect Barack Obama, have called a currency manipulator.