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American debt raises concerns among China's economists
Source: Xinhua |
February 5, 2010, Friday
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Print Edition
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CHINESE economists are again concerned about the value of the country's dollar-denominated assets after the US government's budget plan unveiled Monday forecast a record deficit for 2010.
The economists are worried that, if the Congress approves the budget plan, the US federal government will issue more bonds and print more money to finance the deficit, which may prompt dollar depreciation. Dollar depreciation erodes the value of China's holdings of dollar-denominated assets.
The same fears took hold almost one year ago when the US government said it would issue up to US$2.56 trillion of US Treasury bond debt to stimulate the economy to get through the recession.
This time the budget deficit is larger. The Obama administration on Monday proposed a budget of US$3.83 trillion for fiscal year 2011 with a forecast deficit of US$1.56 trillion in 2010.
The planned fiscal deficit is 10.6 percent of gross domestic product (GDP) - up from a 9.9 percent share in 2009 - the largest deficit as measured against GDP since World War II.
He Maochun, director of the Center for Economic Diplomacy Studies at Tsinghua University, said the deficit would be financed by those holding US dollar-denominated assets, with the main channel to transfer the risks caused by the deficit being the issuance of US Treasury bonds.
Enormous deficit
The US is already in enormous debt, with Treasury data showing public debt topping US$12 trillion in November last year, the highest ever. To pay for the deficit, the US federal government will borrow US$392 billion in the January to March quarter of 2010, according to a Treasury Department statement released Monday. It will then issue US$268 billion of Treasury bonds in the second quarter.
China is the biggest foreign holder of the US government debt. By the end of November last year, China held US$789.6 billion of US Treasury bonds. Moreover, more than 60 percent of China's US$2.399 trillion stockpile of foreign exchange reserves - the world's largest - is in dollars.
Cao Honghui, director of the Financial Market Research Office of the Chinese Academy of Social Sciences (CASS), a government think tank, said the massive US deficit spending and near-zero interest rates would erode the value of US bonds.
The US government should not transfer the problems of enormous debt to other nations or regions that are creditors like China, he added.
China's State Administration of Foreign Exchange (SAFE) said in a statement last December that China would diversify its foreign exchange reserve holdings - both currencies and securities - to reduce risks.
Liu Yuhui, an economist with the CASS, said late last month that China may scale back its purchases of US debt on concerns the dollar will decline. China trimmed its holdings of US government debt by US$9.3 billion last November - the biggest cut in five months - taking them down to US$789.6 billion.
Fragile recovery
Ding Zhijie, associate dean at the finance school at the University of International Business and Economics, said China had been securing its investment value by using its foreign exchange reserves for imports and acquisitions in 2009. "More reserves should be used for investment in materials and resources, which can reduce the risk," he said.
Ding said it is necessary for the US to keep its powerful fiscal stimulus policy in place, as the economic recovery is fragile and remains uncertain.
The US economy shrank 2.4 percent in 2009, but the US government is projecting GDP growth of 2.7 percent in 2010 and an unemployment rate average of 10 percent. Zuo Xiaolei, chief economist at China Galaxy Securities, said the US had no choice but to rely on massive government spending to ensure the economic recovery.
The budget deficit will pump money into the economy and generate jobs, which in turn will generate greater tax revenue that can help pay off the debt, Zuo said. "But there is still a risk the policy will fail and that debt will grow beyond the government's ability to pay."
In that case, the entire global recovery will be threatened.
The economists are worried that, if the Congress approves the budget plan, the US federal government will issue more bonds and print more money to finance the deficit, which may prompt dollar depreciation. Dollar depreciation erodes the value of China's holdings of dollar-denominated assets.
The same fears took hold almost one year ago when the US government said it would issue up to US$2.56 trillion of US Treasury bond debt to stimulate the economy to get through the recession.
This time the budget deficit is larger. The Obama administration on Monday proposed a budget of US$3.83 trillion for fiscal year 2011 with a forecast deficit of US$1.56 trillion in 2010.
The planned fiscal deficit is 10.6 percent of gross domestic product (GDP) - up from a 9.9 percent share in 2009 - the largest deficit as measured against GDP since World War II.
He Maochun, director of the Center for Economic Diplomacy Studies at Tsinghua University, said the deficit would be financed by those holding US dollar-denominated assets, with the main channel to transfer the risks caused by the deficit being the issuance of US Treasury bonds.
Enormous deficit
The US is already in enormous debt, with Treasury data showing public debt topping US$12 trillion in November last year, the highest ever. To pay for the deficit, the US federal government will borrow US$392 billion in the January to March quarter of 2010, according to a Treasury Department statement released Monday. It will then issue US$268 billion of Treasury bonds in the second quarter.
China is the biggest foreign holder of the US government debt. By the end of November last year, China held US$789.6 billion of US Treasury bonds. Moreover, more than 60 percent of China's US$2.399 trillion stockpile of foreign exchange reserves - the world's largest - is in dollars.
Cao Honghui, director of the Financial Market Research Office of the Chinese Academy of Social Sciences (CASS), a government think tank, said the massive US deficit spending and near-zero interest rates would erode the value of US bonds.
The US government should not transfer the problems of enormous debt to other nations or regions that are creditors like China, he added.
China's State Administration of Foreign Exchange (SAFE) said in a statement last December that China would diversify its foreign exchange reserve holdings - both currencies and securities - to reduce risks.
Liu Yuhui, an economist with the CASS, said late last month that China may scale back its purchases of US debt on concerns the dollar will decline. China trimmed its holdings of US government debt by US$9.3 billion last November - the biggest cut in five months - taking them down to US$789.6 billion.
Fragile recovery
Ding Zhijie, associate dean at the finance school at the University of International Business and Economics, said China had been securing its investment value by using its foreign exchange reserves for imports and acquisitions in 2009. "More reserves should be used for investment in materials and resources, which can reduce the risk," he said.
Ding said it is necessary for the US to keep its powerful fiscal stimulus policy in place, as the economic recovery is fragile and remains uncertain.
The US economy shrank 2.4 percent in 2009, but the US government is projecting GDP growth of 2.7 percent in 2010 and an unemployment rate average of 10 percent. Zuo Xiaolei, chief economist at China Galaxy Securities, said the US had no choice but to rely on massive government spending to ensure the economic recovery.
The budget deficit will pump money into the economy and generate jobs, which in turn will generate greater tax revenue that can help pay off the debt, Zuo said. "But there is still a risk the policy will fail and that debt will grow beyond the government's ability to pay."
In that case, the entire global recovery will be threatened.
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