• by Antoaneta Bezlova (beijing)
• Tuesday, January 20, 2009
• Inter Press Service

China is entering the Obama era on a defensive note. Angered by U.S. charges that its glut of savings was the root cause for the global credit bubble, Beijing has chided Washington for being ungrateful and hinted at reviewing its long-standing policy of buying U.S. debt.

'U.S. policy mistakes and regulatory failings were the direct causes of this financial crisis and the roots of the United States’ massive trade deficit lie in its own economic structure and macro-economic polices,' Zhang Jianhua, head of the central bank research bureau, wrote in the People’s Daily, the Communist party’s flagship publication, this week.

Zhang was responding to remarks by exiting U.S. Treasury Secretary Hank Paulson that super-abundant savings from fast-growing, emerging economies like China and the oil-exporting countries 'laid the seeds of a global credit bubble'.

Paulson, who is 'directly involved in dealing with the mountain of toxic assets top U.S. financial institutions accumulated over the years, should know better than most other people about how serious financial mismanagement and regulatory failures are,’’ said an editorial in the China Daily.

Rattled by the comments issued by someone credited with fostering a better degree of understanding between the two countries’ governments, China’s central bank convened a press conference to defend Beijing’s record.

Xuan Changneng, head of financial research at the bank, said it was irresponsible of the U.S. States to point fingers at emerging economies for America’s ills. 'Some countries should learn the concept of accountability and reflect on their own policy of self-criticism,' Xuan said.

Although the remarks that caused the offence were by an outgoing U.S. top official, Beijing is well aware that a change of administration would do little to quiet a growing chorus of U.S. politicians complaining about China’s currency polices and its trade surplus.

China, which has been increasing its share of the U.S. import market for manufactured goods, set another trade surplus record in November, at 40.1 billion dollars.

'There may not be a trade war but 2009 will be a year of increased trade frictions between China and the United States,' Long Guoqiang, researcher at the State Council Development and Research Centre predicted in an interview with the Economic Observer newspaper.

'Our surplus with the U.S. is so big that they may use it as a way of pressurising China to open its markets further and increase U.S. imports,'' Long said in the interview.

Campaigning for the U.S. presidency, Barack Obama irked Beijing with criticisms of China’s trade practices and his demand that China 'play by the international rules'. He has threatened to impose trade sanctions due to mounting concerns over the yawning surplus, currency manipulation and intellectual property rights violations.

'A change in president will not alter the premises of the U.S. system,' warns Tan Yaling, a research fellow with the China International Economic Relations Association. 'When Barack Obama assumes power, the ambition to preserve and perpetuate the leading position of the U.S. currency, the superiority of U.S. economy and the country’s superpower status will be still there.'

The latest rift between Washington and Beijing comes at a bad time for both countries. Last week, the U.S. president-elect told the American public that it should get used to the prospect of 'trillion-dollar deficits for years to come', as the new administration seeks to finance its multibillion dollar economic stimulus package.

China, which sits on 1.9 trillion dollars worth of foreign exchange reserves, has been a key buyer of U.S. debt instruments in the past. More than two-thirds of its reserves are held in U.S. treasuries and in September it became the largest U.S. creditor, taking over from Japan.

China claims it has protected American financial stability by continuously purchasing its treasury bonds. But some U.S. economists say that the easy availability of Chinese credit pushed U.S. interest rates lower and helped fuel an unprecedented consumption spree and housing bubble.

Even before the latest salvo fired by Washington, Chinese leaders have faced mounting domestic calls to reduce the country’s exposure to U.S. government debt.

It would be 'suicidal' for China to put its forex holdings in just the U.S. dollar basket, commentator Jin Bitou, had written on the People’s Daily website late last year.

But as the economic climate worsened the pressure to change tack has grown. The incoming U.S. administration’s plans to issue new debt to fund its increased economic stimulus package have many Chinese analysts worried that a deluge in supply could cause depreciation of China’s foreign reserves.

'Now is the time to diversify our foreign reserves assets,' scholar Yu Yongding wrote in the China Securities Daily. 'With billions of new issuance in the near future, cashing in would become riskier.'

Despite criticisms at home, Chinese government officials have pledged to play a 'responsible role' in holding the U.S. debt.

'My Chinese interlocutors pointed out that they have been very responsible in dealing with the question of the American debt that they hold,' U.S. deputy secretary of state John Negroponte said during his Beijing visit last week to commemorate the 30th anniversary of the establishment of diplomatic relations between the two countries. 'I think that they want to be viewed as a reliable partner in that regard.'

Given China’s dependence on the American export market and the symbiotic nature of the two economies, analysts believe that China will continue to buy U.S. treasury bonds but probably at a much slower rate.

Chinese leaders have already begun preparing the public for a significant slowdown of the domestic economy. With job losses mounting and factory closures on the rise, mainland banks have been advised to keep more money at home and lend it to local governments and companies to maintain economic growth.

© Inter Press Service (2009) — All Rights Reserved. Original source: Inter Press Service

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