Debt headache for China's leaders
By Russell Hsiao
A string of recent pronouncements from Beijing leaders capped off with a strong
statement by Premier Wen Jiabao over his concerns for the value of China's
US$681.9 billion investment in US Treasury bonds has highlighted a troubled
Chinese leadership's outlook for 2009.
Premier Wen's statement was received by analysts as a strong warning to
Washington. It follows a revision in the US$588 billion Chinese fiscal stimulus
package at the recently concluded National People's Congress (China's
parliament) and the release of a joint communique at the close of the Group of
20 finance
minister meeting by Brazil, India, Russia and China. The timing of these
pronouncements outlines the silhouette of China's nascent comprehensive
economic strategy at home and abroad. Moreover, it is an outlay of the on-going
heated debate within China over its roadmap for economic recovery and a test of
Sino-US relations, given China's massive $2 trillion of foreign exchange
reserves.
During the "meet-the-press" session after the close of the NPC on March 12, Wen
said, "We [China] lent such huge fund to the United States and of course we're
concerned about the security of our assets and, to speak truthfully, I am a
little bit worried." In an unusually direct appeal, Wen added, "I request the
US to maintain its good credit, to honor its promises and to guarantee the
safety of China's assets".
On the issue of China's foreign reserves, Wen asserted that Beijing's primary
concern will be to preserve its national interest, but he also acknowledged
that, "we [China] also have to consider the stability of the overall
international financial system, as the two factors are interlinked."
Wen's statement linking China's national interests to stability in the
international financial system were meant to allay concerns over the possible
destabilizing impact of China's rise in the international system. The statement
also reflects the oft-stated official position that China is a responsible
stakeholder, and to brush aside any lingering expectation that China will take
a leadership role in reshaping the post-Bretton Woods system.
In an interview with the Chinese publication Economic Observer, Wu Xiaoling,
vice president of the NPC Financial and Economic Affairs Committee, explained
that "[China's] reserves were a form of liability that could not be directly
used for public spending". "Though the foreign currency reserves are an asset
of the central bank, they are also a liability - the central bank is indebted
to society, and must be safeguarded", Wu said.
Wu was also the ex-deputy governor of the central bank and former chief of the
State Administration of Foreign Exchanges (SAFE), which is the administrative
agency that manages the state foreign reserve system. When asked about the
central government's approach to the management of its foreign reserves under
the global financial crisis, Wu stressed: "Ensure safety, profitability and
liquidity." In the same interview, it was reported that China's account surplus
declined by 27% year-on-year in 2008, illustrating the stress on the value of
Chinese assets. "The best way to minimize [further] risk is to scale down the
size of the foreign currency reserves." According to Wu, other ways the
government can reduce the heavy burden of the reserves is by "setting up a
[yuan] equity investment fund, or expanding trade and foreign investment".
One sector for development clearly targeted by Beijing's diversification
campaign is its strategic petroleum reserves (SPR). As early as January 2009,
Zhang Guobao, head of the NEA and vice-minister of the National Development
Reform Commission, wrote an article in the People's Daily saying, "The country
[China] should take advantage of falling global energy prices to increase its
oil reserves".
According to a plan recently released by China's National Energy Administration
(NEA), China plans to build nine large refining bases along its coastal areas
over the next three years. In a national energy conference in early February,
the NEA also announced that China will build eight new strategic SPR bases on
top of the current four by 2011, and increase China's strategic crude capacity
to 281 million barrels from 103 million. The four existing SPR bases are in
Zhenhai, Zhoushan, Huangdao and Dalian; two confirmed venues for future SPR
tanks are in Huanggao and Jinzhou; and the following venues are possible
locations for the remaining six SPR tanks that are being planned: Quanzhou,
Shantou, Guangzhou, Bao'an, Zhanjiang, Yangpu, Yantai, Binhai, Caofeidian,
Tieling, Linyuan, Lanzhou, Wanzhou and Shanshan.
Western analysts, however, point out that the current strategic and economic
trajectories of the US and China are in a knot: "If China refuses to keep
buying our bonds, the value of the dollar will plunge, and so, too, will the
value of China's foreign reserves held in dollars," said Peter Navarro, an
associate professor of public policy at the Paul Merage School of Business,
University of California, Irvine. Navarro added, "On the other hand, if China
keeps buying our debt to prop up the dollar, it faces a strong likelihood that
with so much fiscal stimulus and easy money coursing through the US system,
inflation is all but inevitable. That, too, will ultimately devalue the dollar
and therefore Chinese foreign reserves. So, for the Chinese, the question is
whether to cut and run now or hold on and be scalped later."
Russell Hsiao is the editor of China Brief at The Jamestown Foundation.
(This article first appeared in The Jamestown
Foundation. Used with permission.Copyright 2009 The Jamestown
Foundation.)
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