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There's no free lunch

(China Daily)
Updated: 2009-06-03 07:46

Though opinion is divided sharply over the necessity to buy more US treasury bonds, few Chinese would think that the country's vast holdings of US financial assets are secure as long as the dollar's long-term value is in doubt.

US Treasury Secretary Timothy Geithner has made use of his recent visit to Beijing to assure Chinese policymakers that Washington is committed to a strong currency as well as disciplined future spending.

Such a US pledge is very much needed for boosting Chinese confidence in the US economy and the US government's efforts to overcome the worst recession in decades. As the largest holder of US government debt, the last thing that China would like to see is the debtor trying to borrow its way out of the current crisis first and then inflating away the value of its debt.

With foreign exchange reserves of about $1.9 trillion, China has bought more than $750 billion worth of treasury securities according to US Treasury data. It is obvious that the value of these debt holdings will plunge if inflation soars or the dollar weakens drastically because of mounting budget deficits.

A global flight to safety since the global financial and economic crisis suddenly deepened last September has, for a while, enabled the US government to fund its successive massive bailouts with cheap foreign capital. But now, soaring risk appetite on hopes of recovery is damaging the appeal of both long-term US government bonds and the dollar.

Washington needs to make clear its resolve to protect the due interest of foreign creditors if it wants China and other countries to continue infusing much-needed funds through purchase of US bonds. US policymakers must understand that they cannot have it both ways - pressing China to revalue its currency while selling the country more US bonds that are bound to depreciate when the Chinese currency becomes stronger.

The very importance of both economies to each other as well as to the rest of the world demands closer cooperation between China and the US from a long-term, global perspective. To shape a smart strategy to contain the crisis and to lay the foundation for a more balanced and sustainable recovery, the two countries need to undertake drastic domestic reforms that are painful but necessary.

The message that Mr Geithner delivered during his visit is encouraging in the sense that the US government has acknowledged the concerns of foreign holders of its treasury debt.

Yet, words alone are inadequate reassurance. Decisive action to rebuild its economy alone can convince foreign creditors that the US is not expecting a free lunch to bail itself out of the crisis.

The bankruptcy of an American corporate icon such as GM looks like a compelling case of the US starting to clean up its economic act. That may be worth a vote of confidence from buyers of US treasury bonds.

(China Daily 06/03/2009 page8)