China Paying ‘Close Attention’ to U.S. Debate on Debt Level

China's Vice Finance Minister Zhu Guangyao
Zhu Guangyao, China's vice-minister of finance. Photographer: Andrew Harrer/Bloomberg

China, the biggest foreign holder of Treasury notes, is closely watching the debate over raising the U.S. debt ceiling and wants the Obama administration to do more to curb the deficit, Vice Finance Minister Zhu Guangyao said.

“We are paying close attention to the domestic discussion in the U.S. on debt and deficits,” Zhu told reporters in Beijing today. “We hope the U.S. can take effective measures toward fiscal reorganization just as President Obama suggested.”

His comments came days before about 30 top Chinese officials travel to Washington for an annual meeting on economic and military cooperation. Treasury Secretary Timothy F. Geithner will meet his counterpart Vice Premier Wang Qishan for two days of talks beginning May 9 and press the U.S. case for allowing China’s currency to appreciate further.

Geithner has said the U.S. can borrow until Aug. 2 after reaching the $14.29 trillion debt limit this month. Matthew Zames, chairman of a Treasury advisory panel and a managing director at JPMorgan Chase & Co., said last week that failure to raise the ceiling could trigger “another catastrophic financial crisis.”

President Barack Obama has offered the outlines of a plan to reduce the growth of the debt by $4 trillion over 12 years through a combination of spending cuts and tax increases. House Budget Committee Chairman Paul Ryan, a Wisconsin Republican, has proposed cutting spending by $6 trillion over a decade in part by privatizing Medicare and capping Medicaid spending.

‘Fiscal Foundation’

The U.S. has to take deficit-reduction measures “in order to improve the U.S. fiscal condition and to build a solid fiscal foundation for the long term sustainable growth of the U.S. economy,” Zhu said. China held $1.15 trillion in Treasuries as of the end of February, more than any other country.

“The U.S. certainly knows that the Chinese are probably the most important customer” for Treasuries, said Cliff Tan, head of emerging-markets research at Societe Generale SA in Hong Kong. “In the event of the unthinkable happening in Congress failing to raise the debt ceiling, you’re going to have a major, major earthquake in global fixed-income markets.”

Zhu said China “will push forward” on improving its currency system and that its focus was on improving the quality of its exchange-rate mechanism while U.S. officials push for faster yuan appreciation.

‘Intensify Communication’

“China is ready to intensify communication with the United States” on the yuan, Zhu said. “We have some differences on some specific issues and differences will be addressed through communication.”

The yuan has appreciated 5.1 percent against the dollar since the last annual meeting between the U.S. and China took place last May in Beijing. Still, the U.S. had a record $273.1 billion trade deficit with China last year as economic growth in both countries accelerated.

Zhu also said that currency policy is the “sovereign right” of every country. Vice Foreign Minister Cui Tiankai said at the same briefing that China’s relations with the U.S. “enjoy a strong momentum of growth.”

Geithner said May 4 in Washington that the U.S. wants China to let the yuan “move in response to market forces more rapidly.” That message will be conveyed next week, David Loevinger, the Treasury’s senior coordinator for China, told reporters in Washington yesterday.

‘Press China’

“We are going to press China to let its exchange rate adjust at a faster pace to correct its still-substantial undervaluation,” Loevinger said. “China continues to intervene massively in foreign-exchange markets to constrain the appreciation of its currency.”

Twelve-month non-deliverable yuan forwards dropped 0.6 percent this week to 6.3455 per dollar as of 11:04 a.m. in Hong Kong. The contracts reflected bets the yuan will strengthen 2.4 percent from the spot rate of 6.4959, according to data compiled by Bloomberg.

A rising yuan and falling dollar reduces the value of China’s holdings of Treasury and other debt. Smaller U.S. deficits may strengthen the dollar and boost the value of China’s holdings.

“Reduced U.S. fiscal spending may lead to a higher possibility of the U.S. dollar appreciation, therefore it helps China to maintain the value of the U.S. debt it holds,” said Li Jun, a Shanghai-based strategist at Central China Securities Holdings.

Arrests and Detentions

While Geithner meets with Wang, Secretary of State Hillary Clinton will meet with State Councilor Dai Bingguo amid increasing concern by the U.S. about a series of arrests and detentions of advocates for more political openness in China following rallies in February inspired by revolts in the Middle East.

The arrests affect the broader relationship between the world’s two biggest economies, U.S. Assistant Secretary of State for Democracy, Human Rights and Labor Michael Posner said last week in Beijing after meeting Chinese officials.

Posner and his team raised concerns about the arrest of artist Ai Weiwei and made a request to see Liu Xia, the wife of jailed Nobel laureate Liu Xiaobo.

Cui said that “the Chinese people should have the final say” on the improvement of the country’s human rights situation.

“We also hope that the outside world can take a realistic approach when observing China’s human rights issues, or to use a trendy phrase, please have a sunnier mentality,” Cui said.

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