Posted on 02/18/2009 2:09:34 PM PST by Ernest_at_the_Beach
BEIJING, Feb. 18 (Xinhua) -- Increased borrowing by the United States to fund its massive stimulus package could cause the depreciation of U.S. dollar-denominated assets, Chinese economists have told Xinhua.
Being the largest holder of U.S. Treasury securities, China had reason to be concerned about that possible depreciation, the economists said.
The 787 billion U.S. dollar stimulus bill, the American Recovery and Reinvestment Act, is designed to jolt the ailing U.S. economy by providing government spending and tax cuts for both individuals and businesses. U.S. President Barack Obama signed it into law Tuesday.
"To rescue the ailing U.S. economy by increasing government borrowing will create a record-high federal deficit," said Yu Zuyao, economist with the Chinese Academy of Social Sciences, a government think tank.
"This can further lead to catastrophic consequences such as serious inflation and U.S. dollar depreciation," he said Tuesday.
China faced high depreciation risk to its foreign exchange reserves, U.S. Treasury bonds and other U.S. dollar-denominated assets, Yu said.
According to the U.S. Treasury, China held 681.9 billion U.S. dollars worth of U.S. government bonds as of November, and it bought another 14.3 billion U.S. dollars worth in December.
"Buying U.S. government bonds amid an economic downturn, [a purchase] that is not based on the sound performance of the U.S. economy itself, indicates a huge bubble," said Zuo Xiaolei, chief economist of China Galaxy Securities.
CONTRACTION LOOMING
Forecasts for the U.S. economy indicate a contraction this year. For example, the U.S. Congressional Budget Office (CBO) forecast that the economy would contract 2.2 percent year-on-year while unemployment would reach 8.3 percent.
According to the World Bank, the U.S. economy would shrink 0.5 percent in 2009, while the International Monetary Fund (IMF) estimated the decline at 0.7 percent.
To boost economic growth, the U.S. government has increased borrowing to fund its expanding fiscal deficit, Zuo said.
The deficit hit 485.2 billion U.S. dollars in the first three months of the current fiscal year (which started Oct. 1), a record high for a first quarter. That first-quarter deficit also outstripped the record for a full fiscal year, of 455 billion U.S. dollars, set last year, according to the U.S. Treasury.
The CBO projected a 1.2 trillion U.S. dollar deficit for fiscal2009.
However, the huge deficit would not immediately lead to inflation, since banks were likely to curb lending as the financial system remained weak, Zuo said. "It might be two or three years before the huge deficit leads to serious inflation."
Analysts noted that if the stimulus plan didn't accomplish its goal of restarting growth, the U.S. government would have to ease its large fiscal burden by borrowing more and issuing more dollars, instead of relying on economic growth.
RECOVERY UNCERTAIN
The timing of a U.S. economic recovery remains uncertain, with broad signs of deterioration including falling corporate profits, increasing bankruptcies and rising unemployment, according to Zhao Xijun, deputy director of the Institute of Finance and Securities at Renmin University.
According to the IMF, whose forecast is one of the more optimistic, the U.S. economic downturn would end late in 2009. The World Bank doesn't see a rebound until 2010.
Huge Treasury bond issues would exacerbate the depreciation of the U.S. dollar and world wealth. Such developments would be more catastrophic than the global financial crisis, according to Zhang Yansheng, head of the International Economic Research Institute under the National Development and Reform Commission, the chief economic planning body in China.
"The United States should be more responsible in addressing the global financial crisis. The U.S. economic stimulus plans should focus more on maintaining financial and currency stability," Zhang said.
A weaker U.S. dollar would hurt that currency's international status, he said, which would "not be in the interests of the United States and other countries and would exacerbate the crisis."
Said Zuo: "U.S. dollar depreciation is inevitable in the long run. China should prepare and reduce its holdings of U.S. Treasuries to a proper size."
The country should also spend some of its huge foreign exchange reserves to buy more energy and resources, she said.
The Chinese government is already seeking to use its foreign reserves "more actively" and efficiently to boost domestic development amid the global economic crisis.
Fang Shangpu, deputy director of the State Administration of Foreign Exchange, noted Wednesday that the report released by the U.S. Treasury of the amount of government bonds held by China included not only the investment from the reserves, but also from other financial institutions.
It might be a hint that Chinese government is not holding as much U.S. government bonds.
China is managing its foreign exchange reserves with a long-term and strategic view, Fang told a press briefing.
"Whether China is to purchase, and to buy how much of the U.S. government bonds will be decided according to China's need," Fang said.
"We will make judgment based on the principle of ensuring safety and the value of the reserves," Fang said.
China's reserves hit a record 1.95 trillion U.S. dollars at the end of 2008, the largest in the world and far exceeding those of Japan, the second-largest foreign exchange holder with 1.03 trillion U.S. dollars.
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| Editor: Deng Shasha |
Treasuries Post Weekly Loss as Auctions Highlight Supply Issue
They have their eye on California as a pleasant place to relocate their surplus population once they foreclose on us.
They could do better buying Mexico.
this bubble is popping soon.
Don't know, it was excerpted to me.
We are going to experience the American version of the cultural revolution. Consider stocking up on non-perishable food and clean water.
Becuase the problem is a cash-flow problem. As long as the money was going around, it could keep happening. Now, one hiccough, and the system falters, stumbles, and ....?
One thing is certain, a lot of dollars are being pumped in one end of the pipeline, and they do not seem to be coming out anywhere. Someone is jamming the pipes or playing with the valves and is going to profit hugely from it.
Walden Bello | February 9, 2009
Editor: John Feffer
As goods pile up in wharves from Bangkok to Shanghai, and workers are laid off in record numbers, people in East Asia are beginning to realize they aren't only experiencing an economic downturn but living through the end of an era.
[snip]
Even though China appeared to be a new driver of export-led growth, some analysts still considered the notion of Asia "decoupling" from the U.S. locomotive to be a pipe dream. For instance, research by economists C.P. Chandrasekhar and Jayati Ghosh, underlined that China was indeed importing intermediate goods and parts from Japan, Korea, and ASEAN, but only to put them together mainly for export as finished goods to the United States and Europe, not for its domestic market. Thus, "if demand for Chinese exports from the United States and the EU slow down, as will be likely with a U.S. recession," they asserted, "this will not only affect Chinese manufacturing production, but also Chinese demand for imports from these Asian developing countries."
[snip]
Being the largest holder of U.S. Treasury securities, China had reason to be concerned about that possible depreciationHeh... thanks Ernest. Still no explanation on how the gov't can borrow money to bail out banks. ;'D
Let us know when China gets its inflation rate down to single figures before we put too much credit in its economic prescriptions.
It is worried about dollar depreciation because it becomes less competitive with US exports when that happens.
If you think this is the result of Free trade you are sadly mistaken. If you think tariffs are the answer to such problems you probably believe taxing can cause prosperity.
Free trade is only important to those who want the consumer to achieve his maximum benifit for his money.
China profitted from US labor becoming too expensive to compete in many areas and because it industries do not have to face the stringent environmental standards US industry does.
The Cloward/Piven Strategy Of Economic Recovery
***********************EXCERPT******************************
February, 7, 2009 — nicedeb
Yes, of course that’s what we’re witnessing right now. I’ve been convinced that the Dems were engaged in something of this nature for some time, now. Only a few months ago did I learn that there was actually a name for this strategy.
Nancy Coppock of The American Thinker shines a light on what we’re dealing with.
Because these programs are financed with deficit spending, the effect of the Cloward/Piven Strategy becomes doubly destructive. Talk about a perfect storm! The Democrat stimulus plan is a mechanism whose goal is the destruction of the traditional American way of life. It is bitter irony that the American taxpayer will actually fund the destruction of his own ability to live according to the values of our Founding Documents. It is not alarmist to identify this situation as a coup d’etat.
I couldn’t have put it better myself.
Hat tip: Ace
Great additional facts Blam. That is what I echoed in essence. China is very dependent upon the world’s needs for their products.
I will wade through the Obama’s Cloward-Piven Strategy posting as I am off work today, and have some time on my hands.
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