Increased borrowing by the United States to fund its massive stimulus package could cause the depreciation of U.S. dollar-denominated assets, Chinese economists said.
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 fiscal 2009.
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 judgement 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.
(Xinhua News Agency February 18, 2009)
