Western media were quick to call Chinese President Hu Jintao’s comments on the US dollar unusually blunt. But there is real value to earnest words, though sometimes unpleasant to the ear.
It is hoped that US policymakers will take it that way.
In his written interview with US newspapers prior to his state visit to the United States that begins on Tuesday, Hu not only pointed out that “the current international currency system is the product of the past”, he also urged that “the liquidity of the US dollar should be kept at a reasonable and stable level”.
The Chinese president is simply highlighting a troubling reality that no country can afford to ignore.
The US dollar has served as the leading reserve currency to facilitate international trade, investment and financial transactions for decades.
However, the 2008 global financial crisis and the following super-loose US monetary policies have increasingly underscored the fact that a US-dollar dominated international currency system is becoming something of an anachronism these days.
In the apparent belief that it can reflate its way out of recession, the US has tried hard to print more money regardless of the fact that this will bring a flood of liquidity into the global economy, especially to emerging economies, and thus send inflation through the roof.
If the current international currency system cannot be timely overhauled and updated to reflect the new global economic landscape, it is hard to believe that the international community can manage to secure, any time soon, a lasting global recovery from the worst financial crisis in about seven decades.
Besides, as the largest foreign holder of US government debts, China’s concern over the safety and value of its assets is fully justified.
According to the US Treasury Department, China’s holdings surpassed $900 billion in October.
That is surely a big sum for both the borrower, who is now running an annual fiscal deficit of more than $1 trillion, and the creditor whose foreign exchange reserves totaled below $3 trillion out of a gross domestic product of less than $6 trillion.
Admittedly, China’s massive purchase of US Treasury securities is a self-made choice to allocate its soaring foreign exchange reserves, mainly accumulated through trade surplus and the inflow of foreign direct investment.
Yet, China’s purchase of US public debts as a means to protect the value of its national wealth embodied in foreign exchange reserves certainly does not represent an endorsement for unbridled printing of US dollars.
It is only natural for Chinese leaders to express worries when US politicians only seem interested in wooing voters while their public debts are setting new records almost day by day.
No country can inflate away its debt without undesirable consequences. US policymakers should take to their hearts President Hu’s words, which he offered as frank advice, in the interests of both countries and the world economy.