- The Washington Times - Monday, March 16, 2009

ANALYSIS/OPINION:

A fire bell tolled in the night for the American economy Friday. Chinese Premier Wen Jiabao said his country is worried about the safety of its estimated $1 trillion in U.S. Treasury bonds.

Mr. Wen told Friday’s session of the People’s National Congress in Beijing that he was “definitely a little worried” about China’s investments in the United States.

“China is indeed the largest creditor of the United States, which is the world’s biggest economy. We are extremely interested in developments in the U.S. economy,” Mr. Wen said, according to a report from China’s official Xinhua news agency.

He stressed what he called China’s principle of guaranteeing the “safety, liquidity and good value” of the nation’s foreign-exchange reserves - the largest of any nation in the world - and the importance of cautiously investing the reserves in many different places.

Mr. Wen did add a reassuring note. “Currently, our reserves are generally safe,” he said.

As long as the dollar is strengthening, China can feel good about its position. However, economists have raised concern that President Obama’s economic stimulus package, backed as it is with massive increase in government debt, could weaken the dollar and threaten China’s investment.

Xinhua noted that China’s foreign-exchange reserves soared to an all-time high of $1.95 trillion at the end of 2008, a far higher figure than in Japan, which has the second-highest national reserves, worth $1.03 trillion, almost half the Chinese figure.

The U.S. Treasury listed China as owning $681.9 billion in U.S. Treasury bonds in November. This figure was far higher than the $585 billion in U.S. bonds it held in September, an increase of more than 16 percent in only two months.

On the one hand, this increase appeared to mark an increase in confidence in the future of the U.S. economy, even after the September economic crisis erupted on Wall Street and then spread around the world. On the other hand, it also indicated that the U.S. financial system and government are now far more dependent on Beijing than they were a few months ago.

As one commentator has observed, the effect of China’s staying away from even one auction of U.S. Treasury bonds likely would be dramatic - it would certainly send a message.

It seems unlikely China will do that in the immediate future as long as the U.S. dollar continues to rise relative to other major international currencies.

This is in large part a problem of China’s making, too. China’s economic model has been intimately tied to buying U.S. debt so that U.S. consumers can drive China’s growth by funding its exports.

China was happy to benefit from the growing bubble but doesn’t now like the results of its bursting. As a result, it will have to readjust its development model and rely more on domestic consumption. That will require developing a better social safety net so that Chinese can spend some of their savings more confidently.

Mr. Obama and Secretary of State Hillary Rodham Clinton certainly recognize the importance of staying on good terms with China. Mrs. Clinton visited Beijing on her first trip overseas after taking office, and discussing ways to manage trade and financial relations was at the top of her negotiating list.

Human rights activists and supporters of the Dalai Lama have decried Mrs. Clinton’s unwillingness to publicly champion their concerns in Beijing. Anyone who wants the U.S. to be able to lecture China and put pressure on it about such issues has to recognize that can’t happen as long as the U.S. government and economy are so dependent on Chinese financial support and cheap industrial and manufactured imports.

Mr. Obama has said he hopes to cut the record annual government deficit that he inherited from the Bush administration by 50 percent within the next four years. There is no doubt that senior Obama administration officials take the issue of national fiscal solvency far more seriously than their predecessors under President Bush did.

However, Mr. Obama’s spending package is far from reassuring to the Chinese and to other major governments around the world. Financial ministers from the Group of 20 gathered in London this weekend to lay the groundwork for next month’s economic summit. There are differences in how they think the crisis should be handled.

Japan has backed a U.S. position of coordinated moves to support the world economy, but European ministers have been pushing instead for regulation of the financial sector.

Bank of France Governor Christian Noyer told the Financial Times of London in comments published Friday that the U.S. needed to fix its financial system. Mr. Noyer said Europe was more advanced in that regard than the U.S.

Mr. Wen’s warning, while measured, was of vast importance. It serves notice to the Democratic masters of the 111th Congress, as well as to their Republican opponents, that their bipartisan ways of doing business through reckless pork-barrel spending as if there were no tomorrow cannot continue.

Tomorrow has just arrived.

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