BEIJING – China should reduce its holdings of US Treasury bonds to protect the value of its massive foreign exchange reserves despite reassurances from US Vice-President Joe Biden, analysts said on Thursday.
“China should move progressively to cut its holdings of US Treasury bonds and use it as leverage to ask Washington to further open its markets, including the high-technology sector, to Chinese investment,” Xiang Songzuo, deputy director of the Center for International Monetary Research at Renmin University of China, said at a forum.
“Washington should provide a guarantee on the safety of China’s assets,” while it is creating global inflationary pressure through quantitative easing to stimulate its economy, Xiang said.
Biden said in a magazine interview before his visit that the US administration “is deeply committed to maintaining the fundamentals of the US economy” to “ensure the safety, liquidity and value of US Treasury obligations for all of its investors”.
Biden said that the fundamental competitiveness of the US economy, such as flexibility and innovation, remain strong, and that President Barack Obama will adopt more measures to stimulate employment and consolidate the recovery.
“But there is very little room left for the US government to revitalize its economy,” said Wei Liang, a researcher with the China Institutes of Contemporary International Relations.
Interest rates are at record low levels, and spending cuts have been made across the board. Even further quantitative easing could backfire, Wei said.
“Low growth and high unemployment will be regular features of the US economy in the future,” Wei said.
Zhu Chao, assistant dean of the School of Finance at the Capital University of Economics and Business, said Biden’s promises were more symbolic than meaningful.
Analysts said that the long-term strategy for China to reduce dollar asset risks is to boost the global profile of the yuan.
“China needs to find an alternative for the US dollar, which means that it must promote the internationalization of the yuan,” Xiang said. But he added that China needs to have a freely convertible yuan, market-based interest rates and an open financial market in order to achieve that goal.
Zhu also advised that China should take active measures to shift away from US Treasury related risk. “For example, China and Russia could hold each other’s currencies as reserves, and use more yuan in the settlement of bilateral trade,” Zhu said.
Stephen Roach, the non-executive chairman of Morgan Stanley Asia, said that the US debt crisis has shaken China’s confidence in Washington but the pro-consumption shift in its economic structure will help reduce the pace of its foreign-exchange accumulation.
“The US debt crisis has taken a serious toll on China’s confidence in Washington’s economic stewardship,” Roach said in a research note.
“China is no longer willing to risk financial and economic stability on the basis of Washington’s hollow promises and tarnished economic stewardship.”
By raising the consumption share of its GDP, China will absorb much of its surplus saving and that will sharply reduce the pace of foreign-exchange accumulation and cut into China’s open-ended demand for dollar-denominated assets, Roach said.