China’s Exports, Not Altruism, Fund U.S. Deficit: Caroline Baum

Commentary by Caroline Baum

Sept. 2 (Bloomberg) -- Any reference to the exploding U.S. fiscal deficit is almost certain to include a mention of China in the very next sentence.

It goes something like this: The U.S. budget deficit is projected to hit a record $1.6 trillion this year and something close to that in 2010. What happens if China is unwilling to finance that deficit?

China, of course, is the largest foreign holder of U.S. Treasuries, with $776.4 billion as of June. That represents a 41 percent increase from June 2008.

These statistics don’t tell the whole story. The two countries actually have a symbiotic relationship, even though it’s portrayed more often than not as parasitic, with the U.S. dependent on China to buy its bonds.

Because the U.S. government spends more than it collects in taxes, it has to borrow -- from you and me, from domestic money managers, from foreign central banks -- to make up the difference.

The idea that China may decide not to finance our deficit makes no sense.

“It’s the equivalent of believing the sun travels around the earth,” says Jim Glassman, senior U.S. economist at JPMorgan Chase & Co.

China is a developing nation that manages its currency, the yuan, to maintain its comparative advantage in producing cheap goods for export. China’s exports to the U.S. rose to a record $337 billion in 2008.

For about three years, from mid-2005 to mid-2008, China let the yuan appreciate from 8.2 yuan per dollar to about 6.82. It’s probably no coincidence that China froze the yuan at 6.83 a year ago as the world economy, and global trade, went into freefall, Glassman says.

Giant Humming Sound

“They’re definitely attuned to the danger of getting less competitive,” he says.

U.S. consumers are happy to buy cheap Chinese goods, paying for them in dollars. China’s exporters turn the dollars they don’t want or need over to the People’s Bank of China, the country’s central bank, in exchange for yuan.

The PBOC, which had dollar reserves of $2.1 trillion at the end of the second quarter, can invest in safe, dollar- denominated instruments, such as U.S. Treasury securities. Or it can sell the dollars in exchange for euros, let’s say, which would depress the value of the dollar.

So unless China wants those factories to stop humming, the PBOC will invest those dollars in the U.S., recent protestations by policy makers notwithstanding.

Job Dependency

There are some 500,000 to 600,000 jobs in the U.S. that are reliant on a product or service they sell in China, according to Jim Bianco, president of Bianco Research in Chicago. In China, the number of jobs dependent on a product or service sold to the U.S. is 50 million to 60 million.

These numbers, which come from China Online, a Chicago think tank, go to the heart of the matter: If the Chinese don’t want to buy U.S. Treasuries or other dollar-denominated assets, they have to stop selling us stuff.

“China needs those jobs,” Bianco says. “It keeps people too busy to organize revolution.”

Historian Niall Ferguson calls the partnership between big saver and big spender “Chimerica.” He fears the two interconnected economies are headed for divorce as U.S. consumers rebuild their savings and China strives to become less export-dependent.

Chinese leaders have been voicing concerns publicly about soaring U.S. spending, huge budget deficits and the potential for higher inflation down the road. They have talked about moving away from an export-dependent economy to one that relies more on domestic demand.

Foreign Exchange

That’s what developing nations typically do when they emerge. It goes hand in hand with an appreciating currency.

As long as China keeps a tight rein on its currency -- selling yuan and buying dollars to keep it from strengthening -- the decision to finance the U.S. budget deficit is secondary.

In buying U.S. Treasuries, China isn’t being altruistic. It’s acting in its self-interest.

China sells the U.S. goods.

China gets U.S. dollars in return.

China invests the dollars in the U.S.

Why this is made out to be anything more than a mechanical transaction is a mystery. (Go back 20 years, substitute Japan for China, and the storyline is the same.)

Reserve Status

Even the discussion about moving away from the dollar as the world’s reserve currency leaves me scratching my head. Reserve currencies aren’t selected by a poll of countries or anointed by a committee of experts at the International Monetary Fund. The dollar is the world’s reserve currency because other countries are willing to hold it in order to trade with or invest in the U.S.

This isn’t to say deficits don’t matter or the U.S. can be cavalier about funding them. Private investors may see no value in a 10-year Treasury yielding 3.4 percent if they anticipate higher inflation.

China’s central bank doesn’t have the same investment parameters. Nurturing growth is a higher priority than enhancing returns.

China’s Public Enemy

The alleged instigator of the Uighur riots doesn’t talk like a terrorist. Demonizing her may backfire on Beijing.

HUGO RESTALL

Washington, D.C.

Rebiya Kadeer is undergoing a Chinese version of George Orwell’s “Two Minutes Hate.” Separatist, extremist, terrorist—China’s state-run media has pulled out the rhetorical big guns to put her beyond the pale of civilized society. By condemning her as the mastermind of last month’s riots that killed 197 people in the northwest region of Xinjiang, Beijing has transformed an exiled businesswoman and dissident into public enemy No. 1 for 1.3 billion people.

Even Ms. Kadeer’s family in China has joined the campaign—under duress, she says. After blaming her for the loss of innocent lives, several of her children and other relatives exhorted her in an open letter, “Don’t destroy the stable and happy life in Xinjiang. Don’t follow the provocation from some people in other countries.” In scenes reminiscent of the Cultural Revolution, the signatories have appeared on state television to publicly disavow Ms. Kadeer.

This blood-stained image is hard to reconcile with the diminutive grandmother, dressed modestly in black, who bustles about a cramped, U.S. government-funded office a block from the White House. Ms. Kadeer may be hated by many Chinese, but the president of the World Uighur Congress inspires admiration among the nine million ethnically Turkish Uighurs in Xinjiang and two million-strong diaspora. An indication of why she inspires such strong emotions comes as she responds to the first question; she speaks with a startling intensity, perching on the edge of a folding chair.

First of all, Ms. Kadeer denies she instigated the July 5 protests in her home town of Urumqi: “I did not tell them to come out on that day or that particular time to protest. It was the six decade-long repression that has driven them to protest.”

Ms. Kadeer’s own life is a graphic illustration of that repression’s ebb and flow. In the 1980s and early ’90s, she and her fellow Uighurs benefited from Deng Xiaoping’s loosening of controls in all areas of life. Like business pioneers around the country, she overcame obstacles created by Chinese officialdom to build a market stall into a business empire encompassing retail, real estate and international trade.

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Zina Saunders

Just as difficult was overcoming the Uighur community’s resistance to the idea of a woman taking the lead. Ms. Kadeer’s nickname was djahangir, a word of Persian origin meaning one who pushes forward regardless of the consequences.

The Uighurs are a fiercely independent people who have eked out a living in the arid Central Asian lands along ancient caravan routes and converted to Islam in the 15th century. During the Qing dynasty (1644-1912), China’s Manchu rulers managed to subjugate the Uighurs and other local tribes but had to fight off periodic revolts. After the collapse of the empire, the region briefly became the East Turkestan Republic before falling under the thumb of Mao’s People’s Republic. Many Uighurs still harbor dreams of eventual independence.

Once Ms. Kadeer succeeded in business, both the Communist Party and the Uighurs embraced her as a leader. In the mid-1990s she became China’s fifth richest person, and the party gave her a seat in the Chinese People’s Political Consultative Conference, part of the country’s rubber-stamp legislature.

But the tide was already turning against the Uighurs and other minorities. New policies and appointees from Beijing led to campaigns to assimilate the Uighurs and root out all dissent. That prompted Ms. Kadeer to make a fateful choice about where her true loyalties lay. She became increasingly outspoken about policies preventing Uighurs from sharing in the fruits of economic development. Finally, in March 1997, she gave an impassioned speech before the legislature enumerating the burdens faced by her people.

Immediately the party struck back. It took away Ms. Kadeer’s positions, then destroyed her businesses. Having once held her up as a model citizen, the official media tossed her accomplishments down the memory hole. Her rise from rags to riches is now said to be the result of “economic crimes,” including tax evasion and swindles. In 2000, a court sent her to prison for divulging “state secrets” for trying to send newspaper clippings to her exiled husband in the U.S. In 2005 she was allowed to emigrate to the U.S. in return for a promise not to engage in politics, a promise she promptly broke.

Now Ms. Kadeer is trying to garner support for the Uighurs from that most elusive of friends, the “international community.” Even as other parts of China continue to liberalize, she says, repression is intensifying in Xinjiang. She explains, for example, that there is new pressure to use Chinese rather than the Uighur language: “Even during the Mao years, he was a brutal dictator of course, but at least the Uighur people spoke their own language, and at least the Uighurs were free to live in their own courtyards.” Today, the government is flooding the region with Chinese immigrants, making the Uighurs a minority in their own homeland.

Uighurs face discrimination in education, employment, religion and even the ability to move around the country or travel abroad. Farmers are losing their small plots of land and being forced into the cities. Downtown Kashgar, the Uighurs’ cultural capital, is being demolished to make way for Chinese-owned real-estate developments.

But the final straw may have been a measure ostensibly designed to alleviate poverty: “Now the authorities force young, unmarried women to go to eastern China to work as cheap labor in sweatshops,” Ms. Kadeer says. “And this is a really provocative policy because it is against Uighur people’s culture, religion and way of life to send their unmarried daughters to far-away places they themselves have never heard of. This policy has tremendously backfired.”

One such deportation (villages are required to fill a quota) provided the spark for the July 5 protests. In April, some 400 Uighur men and women were sent to work in a toy factory in the town of Shaoguan in Guangdong province. At the end of June, after a disgruntled Chinese worker circulated a rumor that the Uighurs had raped Chinese women, a mob killed at least two of the outsiders.

Video of the riot quickly circulated on the Internet within Xinjiang, along with comments by Chinese that more Uighurs should be killed, while the authorities failed to announce measures to bring those responsible to justice. The city of Urumqi, capital of Xinjiang, become a powder keg of discontent.

According to Chinese accounts, protests began at around 5 p.m. on July 5 in the center of Urumqi and only turned violent more than three hours later. Whether or not this shift was sparked by the police attacking protesters remains in dispute. What cannot be disputed is that Uighur rioters killed Chinese, smashed windows, and burned cars in a shocking orgy of violence.

The intensity of the anger says much about the pent-up resentment of the population, and seems to have taken the authorities by surprise: “After six decades of repression Chinese officials had become confident they had control, and they were shocked at how quickly they lost control,” Ms. Kadeer says. “They realized what six decades of repression and fake autonomy could lead people to, and of course that’s the failure of their policies . . .” The Party’s unwillingness to accept that failure meant it needed Ms. Kadeer as a scapegoat.

The best evidence Ms. Kadeer did not instigate the riots paradoxically comes from the Chinese themselves. A documentary provided by the Foreign Ministry entitled “July 5th Riot and Rebiya Kadeer” makes it clear the Chinese were listening to Ms. Kadeer’s phone conversations to China and Europe. The most damning evidence the government propagandists could come up with is that she telephoned her relatives in Xinjiang to warn them that something big was brewing.

It seems more likely the protests were organized among residents of Urumqi using cell phones and the Internet. Immediately afterward, the government shut down all telecommunications and is only now reopening the networks.

Ms. Kadeer denies having the ability to orchestrate events within Xinjiang, but she freely admits that she maintains contact with family members and friends. “Of course we have some influence, but we did not influence what took place. There is no organization there.”

Two of her sons have been jailed, she says, in a bid to stop her from speaking out. “Because the Chinese government failed to silence me by imprisoning them, now they are blaming me for the protests to silence my voice in the world.”

The same documentary contains a disturbing clip of Ms. Kadeer’s forced confession on the eve of her release in 2005, a scene reminiscent of the war crimes confessions of American soldiers captured by the Chinese during the Korean War: “My motherland is like my parents. I was born after the Liberation, the Communist Party is an eternal benefactor. Whoever seeks to separate his country will be the enemy of his nation. . . .”

The government’s insistence that any dissent is equivalent to separatism, which in turn is evidence of terrorism, explains why Uighurs have been driven to such desperation. “When Uighurs who are not happy about policies stand up to say something,” Ms. Kadeer explains, “the Chinese label them as terrorists, separatists or extremists, and arrest them and in some cases execute them.”

Yet she does not rule out Xinjiang remaining part of the Chinese state—so long as Uighurs have self-rule within a democratic polity.

Demonizing Ms. Kadeer as a separatist may end up backfiring on Beijing. Uighurs had failed to attract as much international support as Tibetans because they lacked a figure like the Dalai Lama to speak on their behalf. Now they have a spokeswoman who is attracting angry démarches from Chinese diplomats as she travels the world.

In the last couple weeks she has visited Tokyo and Melbourne, Australia. In Melbourne she spoke at a film festival where a documentary about her life, “The 10 Conditions of Love,” was shown for the first time. After Beijing failed to convince festival organizers to withdraw the documentary, Chinese filmmakers withdrew their own movies in a move widely seen as government-orchestrated.

Ms. Kadeer is not phased by the pressure, and indeed her stubbornness is again coming to the fore. She seems to have drawn a lesson from the failure of the Dalai Lama’s softly, softly approach: Beijing only respects strength. She is determined to stir the pot, not turn the other cheek, in order to force China to the negotiating table.

Asked whether Uighurs should wait for the advent of democracy in China, she answers that by that time they may have lost their cultural identity. As difficult as it may be, the onus is on her and other Uighurs abroad to pressure the Chinese government into talks on greater autonomy: “I urge peace to the Uighurs,” she says, “they should remain peaceful no matter what happens, because the Chinese government will use any excuse to further crack down on them. So it is up to us, it is our responsibility to negotiate with the Chinese government to resolve the situation on the ground.”

But the immediate outlook for the Uighurs looks bleak. as China’s top government official, Nur Bekri, has promised to crack down with an “iron hand.” Ms. Kadeer claims that 10,000 Uighurs were rounded up after the violence.

Perhaps even more frightening is the way in which the government’s efforts to obscure the real roots of the riots are stirring up Chinese nationalism. The day after the Urumqi protests, a Chinese mob took to the streets looking for Uighurs. “The . . . Chinese government is indoctrinating its own people with ultranationalism,” Ms. Kadeer says. “It used to be the security forces arresting and killing Uighurs. Now it is the Chinese mobs themselves [who] are after Uighurs, both in Shaoguan and Urumqi. They know they can kill Uighurs and the police will turn a blind eye and just say it is a clash between peoples.”

Perhaps the worst-case scenario for China is the possibility that some other individual will emerge as the “mastermind” of the Uighur movement. As a religiously moderate and largely secular figure, Ms. Kadeer is somebody Beijing might negotiate with.

But Beijing’s efforts to portray resistance in Xinjiang as another front in the war on terror could become a self-fulfilling prophecy if Islamic fundamentalism takes root among the restive Uighurs and the global forces of jihad begin to target China. The need to avert that tragedy is the best argument for China to acknowledge its past mistakes in Xinjiang and end the campaign to demonize Rebiya Kadeer.

Mr. Restall is the editor of the Far Eastern Economic Review and a member of the editorial board of The Wall Street Journal.

China’s Gold Rush

China’s Gold Rush, Treasury Trepidation, Lewis vs. Paulson, Brushing Off Bad News, and More!

by Addison Wiggin & Ian Mathias

• Another sign China's ditching the dollar? Gold holdings overtake the Swiss
• Chuck Butler on the Treasury auction that might "break the proverbial camel's back"
• Market celebrates awful numbers because they're better than expected
• Somebody's lying here... Is it Ken Lewis or Hank Paulson?
• The 5 wades into the global warming debate... Hey, the water's fine

As we’ve been suspecting, the Chinese have been accumulating gold, slowly, but surely. They made the announcement this morning. Really, what would you do if you were sitting on $1.9 trillion in foreign reserves – more than half of it minted in U.S. dollars?

The State Administration of Foreign Exchange says China’s reserves now total 1,054 metric tons – up from 600 in 2003. If you’re keeping score at home, that’s a 76% increase in five years.

These new numbers place China fifth among nations that disclose its gold holdings – just ahead of Switzerland.

Given pronouncements made by Premier Wen leading up to the G-20 meeting last month, you can count on China to pick up a fair share of the $12 billion the International Monetary Fund (IMF) plans to sell this year.

Bankers and finance ministers from the G-20 countries meet again in Washington this weekend. The Chinese have indicated they’re going to hang some details on the proposal to move away from the dollar as the world’s reserve currency… and toward the quasi-currency “special drawing rights” issued by the IMF.

The news is enough to keep gold above $900 this morning. It sits around $908 as we write. It’s also enough to push down the dollar. The dollar index is down almost a full point, to 84.6, this morning.

“I've been carrying on,” writes Chuck Butler in the Daily Pfennig this morning, “about how the deficit spending here in the U.S. is going to require a TON of Treasuries to be sold to finance the government.”

“Well... Yesterday morning, the U.S. announced that they would sell Treasuries in these amounts, and tenors... $40 billion 2-year, $35 billion 5-year and $26 billion 7-year, next Monday, Tuesday and Wednesday, respectively.

“OMG! That's over $100 billion in new Treasury issuance that the markets are going to have to digest... Is it the straw that breaks the proverbial camel's back? Are the markets saying, ‘We don't believe you will be able to successfully auction that amount without aggressively raising the yield?’ I think so...”

For the record, we believe that’s Chuck’s first use of “OMG” in print – a significant event, to be sure.

Gold and stocks have been moving up in tandem as we approach week’s end. Yesterday brought a bumpy ride for stocks. A couple of regional banks turned in good earnings. So did Apple. But the good news tussled with the unemployment claims numbers we brought you yesterday. In the end, the Dow and the S&P both gained a little under 1%.

The good vibes have carried into today, with both of those indexes up more than 0.5% at the opening.

The market is sloughing off bad news from the two of the Big 3 Detroit automakers. GM confirmed the rumors that it’s shutting down 13 assembly plants for as many as nine weeks this summer. Chrysler, meanwhile, might have to go to bankruptcy court even if it can work out a deal for Fiat to take a big stake in the firm. (Yawn…)

The one U.S. automaker that’s not circling the bowl, Ford, reported a $1.4 billion quarterly loss. But hey, it wasn’t nearly as bad as feared… so Ford is up nearly 20% as we write.

Traders are likewise cheered by the news that durable-goods orders fell 0.8% in March. Analysts were expecting that orders for cars, appliances, furniture and the like would fall nearly twice that amount. So… hooray?

Continuing the administration’s “glimmer of hope” media tour, Treasury Secretary Tim Geithner took timeout yesterday to opine in the Financial Times that the worst of the recession is behind us. Probably.

“In recent weeks,” says Tiny Tim, “there have been some encouraging signs that the global economic downturn may be slackening.” Of course, significant challenges and risks remain. (Yawn. Streeetch.)

Today's the day America's 19 biggest banks get their results from the rigorous "stress tests" Geithner’s Treasury men have administered in recent weeks.

Of course, you and I will know the results a week from Monday, giving Treasury officials plenty of time to spit shine the figures into a nice sheen. Still, the methodology used to perform the tests will be made public today. Analysts will have more than a week to apply that methodology to the numbers they already know and draw their own conclusions. Will this exceedingly slow and painful rollout of measures aimed at calming the markets backfire? We'll see… if we don’t claw our eyeballs out first.

Traders are also ignoring revelations about exactly what went down when Bank of America took over Merrill Lynch last September.

In testimony to New York Attorney General Andrew Cuomo, BoA head Ken Lewis explained why he never informed his shareholders about Merrill's huge losses before completing the takeover: Then-Treasury Secretary Hank Paulson ordered him not to.

If Lewis went ahead and disclosed Merrill's losses anyway, Paulson would have had him fired, along with the entire board of directors. Lewis said Paulson forced him to choose between the government and his shareholders.

Oh, and this order came "at the request" of Fed Chief Ben Bernanke.

Paulson and Bernanke have both issued denials. So someone's lying here. If Lewis is lying, he committed perjury. If Lewis is telling the truth, Paulson essentially ordered him to break the law by not disclosing "materially significant" financial hits to the shareholders. What a mess. (This is still America we’re writing about, isn’t it? Oh, yeah… it is. Just checking.)

Someone’s lying here, too:

“Now that lawmakers have set aside a tidy $1.6 billion for scientific research in areas such as climate change,” suggests Barron’s this morning, “(much of that likely will go to those who think man-made pollution will have disastrous consequences for Earth), it might be well to look at what the skeptics say.”

"There's definitely been a cooling trend over the last couple of years," Jeremy Ross, a meteorologist at Storm Exchange, a weather risk-management firm, told Dow Jones’ weekly rag. “Indeed, 2008 was the coolest the North Pacific Ocean has been since 1956, which is ‘partly responsible for the cooler winter we've been having this year.’"

For a comment on Ross’ claim, The 5 was able to reach the former Vice President Al Gore, the guy who has already won the Nobel Prize for, umn, Peace for converting his PowerPoint presentation about other people’s work on the subject into a movie:

Of course, the climate, like economics, is a fickle beast. “Climate is known to be variable,” says Michael Reilly of the Discovery Channel, “a cold winter, or a few strung together, doesn't mean the planet is cooling. Still, according to a new study in Geophysical Research Letters, global warming may have hit a speed bump and could go into hiding for decades...

“Following a 30-year trend of warming, global temperatures have flat lined since 2001 despite rising greenhouse gas concentrations, and a heat surplus that should have cranked up the planetary thermostat.”

At least we got the regulations on the books condemning those gases before the climate really starting cooling down again. Phew.

“Well, I have to say something about your comment on Obama cutting $100 million of expenses. Now, I am not a fan of his, but do think that making fun of any government attempt to save money is not the right thing to do? What needs to be done is a pat on the back and encouragement to do some more cutting. It’s like with little kids – you have to reinforce the kudos so they try harder, not make fun of their attempt.”

The 5: We’re making fun of him… but you compare the president and the Cabinet to little kids. Hmn. Another reader sent this graph showing how much more encouragement they really do need:

Former economic adviser to George W. Bush Greg Mankiw ironically put it this way: “Imagine that the head of a household with annual spending of $100,000 called everyone in the family together to deal with a $34,000 budget shortfall. How much would he or she announce that spending had to be cut? By $3 over the course of the year – approximately the cost of one latte at Starbucks. The other $33,997? We can put that on the family credit card and worry about it next year.”

“Hot Topic was smart for getting the preview tour of the Twilight stars,” writes a reader, responding to the cage match HOTT inspired between two of our top options analysts. “Some malls had 1,000-2,000 teen girls waiting to get into the store to see their new heartthrobs. The entire Twilight series was a home run to Hot Topic. Now how does it repeat that home run in 2010?”

The 5: It’s working that, for sure. Yesterday, a director was named for the third movie in the series, due for release in 2010 – even while shooting’s still under way on the second movie now. By your response, I’m guessing you’re coming down on Burritt’s side of the debate.

One last note today: Our trusty steed “Extreme” Ian Mathias is out today and will be for the next 10 days. We’re told he found some lodging in San Juan, Puerto Rico, and is going to hole up there without his “bike, the Internet or TV” for awhile. We wish him bonnes vacances today.

At the same time, we welcome writer-in-residence, the reformed blogger known as “Dollar Bear” Dave Gonigam to the bridge. Dave’s going to help assemble The 5 over the next week or so. We expect smooth sailing until Thursday of next week, when we head over to London for some meetings regarding our new partners in India.

China’s Premier Wen ‘Worried’

China’s Premier Wen ‘Worried’ on Safety of Treasuries (Update2)

March 13 (Bloomberg) -- China, the U.S. government’s largest creditor, is “worried” about its holdings of Treasuries and wants assurances that the investment is safe, Premier Wen Jiabao said.

“We have lent a huge amount of money to the United States,” Wen said at a press briefing in Beijing today. “I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”

White House National Economic Council Director Lawrence Summers, asked about Wen’s remarks, said overseas “confidence” in Treasuries would be hurt without the administration’s steps to end the economy’s decline. President Barack Obama is relying on China to sustain buying of Treasuries amid record amounts of debt sales to fund a $787 billion stimulus package.

“China’s purchases of American debt have been one of the few bolts keeping the wheels on the global economy,” said Phil Deans, a professor of international affairs at Temple University in Tokyo. “If China stops buying, where does Obama’s borrowing to fund his stimulus come from?”

Treasuries declined after Wen’s remarks, before recouping the losses later. Yields on benchmark 10-year notes rose as high as 2.96 percent, from 2.85 percent late yesterday, and were at 2.83 percent at 12:27 p.m. in New York.

Loss on Treasuries

Treasuries have handed investors a loss of 2.7 percent in yuan terms this year, according to Merrill Lynch & Co.’s U.S. Treasury Master index. Chinese investors increased their holdings of the bonds 46 percent to $696 billion in 2008, according to U.S. Treasury data.

“Of course we are concerned about the safety of our assets,” Wen said after the annual meeting of the legislature. “To be honest, I am a little bit worried.”

Summers said that taking “austerity” measures would be even worse for the economy and financial markets, which he said he tracks “very closely.” Answering questions after a speech at the Brookings Institution in Washington, he said it’s “fiscally responsible” to implement measures in the near term that will restore longer-term growth.

China should seek to “fend off risks” as it diversifies its $1.95 trillion in foreign-exchange reserves, Wen said. Yu Yongding, a former adviser to the central bank, said in an interview on Feb. 10 that the nation should seek guarantees that its Treasury holdings won’t be eroded by “reckless policies.”

Haven Demand

Demand for the relative safety of Treasuries has been supported in the past two years as finance companies reported $1.2 trillion in credit losses. China boosted holdings of government debt as it lost of more than $5 billion from investing $10.5 billion of its reserves in New York-based Blackstone Group LP, Morgan Stanley and TPG Inc. since mid-2007.

Currency market moves have been more favorable to holding U.S. bonds this year. Chinese investors who bought Japanese government bonds would have lost 7.7 percent so far this year in yuan terms, compared with a 7.3 percent loss for holders of German bunds, according to the Merrill Lynch indexes.

“China won’t sell the U.S. debt now as that will only drive down Treasury prices, hurting not only the U.S. but also the value of its own investments,” said Shen Jianguang, a Hong Kong- based economist at China International Capital Corp., an investment bank partly owned by Morgan Stanley.

G-20 Meeting

U.S. Treasury Secretary Timothy Geithner will defend his spending plans at the Group of 20 meeting near London this weekend. French Finance Minister Christine Lagarde and Germany’s Peer Steinbrueck want the summit to focus on improving regulation and restraints on the finance industry.

The U.S. trade deficit and the government’s “nearly unrestricted” borrowing led to excess liquidity worldwide and “sowed the seeds” of the financial crisis, the People’s Bank of China said in a report today. The dollar has dropped 17 percent against the yuan since China ended a fixed exchange rate in July 2005. It was little changed at 6.8384 yuan today.

“China is worried that the U.S. may solve its problems by printing money, which will stoke inflation,” said Zhao Qingming, a Beijing-based analyst at China Construction Bank Corp., the country’s second-biggest lender. “If the U.S. can make sure this won’t happen, then China will continue to invest.”

U.S. Secretary of State Hillary Clinton, while visiting officials in Beijing on Feb. 22, urged China to continue buying U.S. debt, which she called a “safe investment.” She didn’t press China on its foreign-exchange policy, backing away from January comments by Geithner that the Chinese government manipulates its currency to boost exports.

Exchange Rates

China will maintain its policy of seeking a stable yuan, even as gains against the euro and Asian currencies hurt the nation’s exporters, Premier Wen said.

While the yuan has weakened 0.2 percent against the dollar this year, there has been a “drastic depreciation” in the euro and Asian currencies that has put a lot of pressure on Chinese exporters, Wen said. The currency has gained 8.6 percent against the euro this year and 6 percent against the Philippine peso.

“Our goal is to maintain a basically stable yuan at a balanced and reasonable level,” Wen said on the final day of the meeting of the National People’s Congress. “At the end of the day, it is our own decision and any other countries can’t press us to depreciate or appreciate our currency.”

Export Slump

Collapsing exports have dragged China’s economy to its weakest growth in seven years and eliminated the jobs of millions of migrant workers. Wen reaffirmed China’s target of an 8 percent expansion in 2009 as economies from the U.S. to Japan contract, saying the goal was “difficult but possible” to achieve.

China can add “at any time” to 4 trillion yuan ($585 billion) of stimulus measures to revive the world’s third-biggest economy, Wen said. Gross domestic product expanded 6.8 percent in the fourth quarter, compared with 9 percent for all of last year and 13 percent for 2007.

“We have reserved adequate ammunition,” Wen said, adding that the fiscal deficit is under control and the debt level still safe. “At any time, we can introduce new stimulus.”

Delegates of China’s legislative advisory body suggested that the government diversify away from Treasuries into more risky assets. Jesse Wang, executive vice president of China Investment Corp., said on March 4 that the nation’s $200 billion sovereign wealth fund may invest in “undervalued” commodities.