Leading economists have urged the United States to use concrete measures instead of empty words to ward off possible losses in China's holdings of US treasury bonds, which have already surpassed $800 billion.
The call comes amid widespread concern that US countermeasures to battle the financial crisis are creating another credit bubble and failing to regulate financial markets.
"So far the US government and the Federal Reserve have failed to provide China with any details of how its countermeasures against the financial crisis will not lead to serious capital losses to China's holding of its treasury bonds and foreign reserves," Yu Yongding, a renowned think tank economist with Chinese Academy of Social Sciences, told China Daily.
Yu's concern is shared by China's leadership, and Premier Wen Jiabao has repeatedly expressed his concerns on the issue.
Yu also highlighted the urgency in the keynote paper at a weekend forum organized by the Washington-based Brookings Institution and the Chinese Economists 50 Forum, a Beijing think tank.
Economists from the two organizations touched on countermeasures against the financial crisis, trade protectionism and climate change, which, including Yu's concern, are topics sure to be high on the agenda when US President Barack Obama and Chinese President Hu Jintao meet at the upcoming United Nations (UN) climate change summit in New York and the Group of 20 leaders summit in Pittsburgh in September.
Yu said the US has tried to reassure China that its huge $2.1-trillion foreign exchange is safe and that the US dollar will remain strong.
"But nobody knows whether the US, if it gets desperate, can refuse the temptation to inflate away its debt burden," said Yu in the paper.
Yu said that China has missed good opportunities to diversify its holding of foreign reserves but there still exists room to bargain with the US government to find solutions to the huge sum of assets.
Eswar Prasad, trade policy professor with Cornell University and a senior fellow at Brookings, said that in the short run China is locked into its dependence on exports and it is unlikely it will aggressively shift out of dollar-denominated assets since this could trigger a depreciation of the dollar and erode the value of China's non-dollar assets.
During a sideline interview on the weekend, Lou Jiwei, chairman of China Investment Corp (CIC), which manages the $298-billion sovereign wealth fund, admitted the risk of a decline in the dollar was a national issue for China.
But the risk will not stop CIC from investing in the US. Lou said CIC can buy anywhere in the world, but it cannot avoid buying US assets because the US economy and capital markets are so large.
Lou told reporters that CIC was building a broad investment portfolio that includes products designed to hedge against both inflation and deflation, and to provide guaranteed returns in the event of a new crisis.
"We have to be in everything because you never know what's going to happen in this world," Lou said. Lou's CIC was set up in September 2007 with $200 billion of foreign currency reserves transferred from the central bank, which manages its own stockpile of $2.1 trillion.
Lou also urged the US to take courage to root out the causes of financial crisis and step up immediate measures to mange its $4 trillion in toxic assets in the banks.
"The US should not only be a good teacher but also a doer," said Lou, adding that the US is experienced in tackling bad assets.
He recalled that the US taught China to separate bad-performing assets from its State-owned banks several years ago and now the corporate governance and balance sheets of Chinese banks are in good shape.
"But now I am disappointed the US just teaches and doesn't show itself willing to act," said Lou. "Only by solving the fundamental problems can the US ensure a financially safe world."