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Shrinking value of T-bills raises alarm
Source: Xinhua |
February 20, 2009, Friday
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MANY Chinese economists argue that increased borrowing by the United States to fund its stimulus package could cause the depreciation of US dollar-denominated assets.
As the largest holder of US Treasury securities, China had reason to be concerned about possible depreciation, the economists say.
The US$787 billion stimulus bill, the American Recovery and Reinvestment Act, is designed to jolt the ailing US economy by providing government spending and tax cuts for both individuals and businesses. US President Barack Obama signed it into law on Tuesday.
"To rescue the ailing US 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 US dollar depreciation," he said on Tuesday.
According to the US Treasury, China held US$681.9 billion worth of US government bonds as of November, and it bought another US$14.3 billion worth in December.
"Buying US government bonds amid an economic downturn indicates a huge bubble," said Zuo Xiaolei, chief economist of China Galaxy Securities.
Forecasts for the US economy indicate a contraction this year. For example, the US Congressional Budget Office (CBO) forecast that the economy would contract 2.2 percent year-on-year while unemployment would reach 8.3 percent.
To boost economic growth, the US government has increased borrowing to fund its expanding fiscal deficit.
The deficit hit US$485.2 billion in the first three months of the current fiscal year (which started October 1), a record high for a first quarter. That first-quarter deficit also outstripped the record for a full fiscal year, of US$455 billion, set last year, according to the US Treasury. The CBO projected a US$1.2 trillion 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 US government would have to ease its large fiscal burden by borrowing more and issuing more dollars.
The timing of a US 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.
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 US economic stimulus plans should focus more on maintaining financial and currency stability," Zhang said.
A weaker US 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: "US dollar depreciation is inevitable in the long run. China should prepare and reduce its holdings of US 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.
Fang Shangpu, deputy director of the State Administration of Foreign Exchange, noted Wednesday that the report released by the US 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 US government bonds as had been thought previously.
China's reserves hit a record US$1.95 trillion at the end of 2008, the largest in the world and far exceeding those of Japan, the second-largest foreign exchange holder with US$1.03 trillion.
As the largest holder of US Treasury securities, China had reason to be concerned about possible depreciation, the economists say.
The US$787 billion stimulus bill, the American Recovery and Reinvestment Act, is designed to jolt the ailing US economy by providing government spending and tax cuts for both individuals and businesses. US President Barack Obama signed it into law on Tuesday.
"To rescue the ailing US 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 US dollar depreciation," he said on Tuesday.
According to the US Treasury, China held US$681.9 billion worth of US government bonds as of November, and it bought another US$14.3 billion worth in December.
"Buying US government bonds amid an economic downturn indicates a huge bubble," said Zuo Xiaolei, chief economist of China Galaxy Securities.
Forecasts for the US economy indicate a contraction this year. For example, the US Congressional Budget Office (CBO) forecast that the economy would contract 2.2 percent year-on-year while unemployment would reach 8.3 percent.
To boost economic growth, the US government has increased borrowing to fund its expanding fiscal deficit.
The deficit hit US$485.2 billion in the first three months of the current fiscal year (which started October 1), a record high for a first quarter. That first-quarter deficit also outstripped the record for a full fiscal year, of US$455 billion, set last year, according to the US Treasury. The CBO projected a US$1.2 trillion 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 US government would have to ease its large fiscal burden by borrowing more and issuing more dollars.
The timing of a US 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.
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 US economic stimulus plans should focus more on maintaining financial and currency stability," Zhang said.
A weaker US 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: "US dollar depreciation is inevitable in the long run. China should prepare and reduce its holdings of US 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.
Fang Shangpu, deputy director of the State Administration of Foreign Exchange, noted Wednesday that the report released by the US 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 US government bonds as had been thought previously.
China's reserves hit a record US$1.95 trillion at the end of 2008, the largest in the world and far exceeding those of Japan, the second-largest foreign exchange holder with US$1.03 trillion.
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