China bank adviser: We can buy stuff instead of Treasuries

China's Yu Says U.S. Shouldn't Be Complacent About Treasuries

By Kevin Hamlin
Bloomberg News
Monday, June 1, 2009

BEIJING -- China's former central bank adviser Yu Yongding will meet Treasury Secretary Timothy Geithner today and tell him the U.S. shouldn't be complacent about China continuing to buy Treasuries.

"I wish to tell the U.S. government: 'Don't be complacent and think there isn't any alternative for China to buy your bills and bonds,'" Yu said in an interview yesterday. "The euro is an alternative. And there are lots of raw materials we can still buy."

Yu is scheduled to meet Geithner at the Grand Hyatt Hotel in Beijing today.

China is the biggest foreign holder of U.S. Treasuries with $768 billion at the end of the first quarter. Premier Wen Jiabao in March called for the U.S. "to guarantee the safety of China's assets" and central bank Governor Zhou Xiaochuan has proposed a new global currency to reduce reliance on the dollar.

China is concerned that the U.S.'s spending and planned record fiscal deficit will eventually lead to inflation and a loss of confidence in the dollar, undermining the value of China's Treasury holdings, Yu said.

The deficit is projected to reach $1.75 trillion in the year ending Sept. 30 from last year's $455 billion shortfall, according to the Congressional Budget Office.

The Obama administration aims to reduce the fiscal deficit to "roughly" 3 percent of gross domestic product from a projected 12.9 percent this year, Geithner said in Beijing yesterday.

The treasury secretary, on a two-day visit to the Chinese capital, said that China's investments in U.S. financial assets are very safe, and that the Obama administration is committed to a strong dollar.

The U.S. should take China's interests into consideration "so that your own interest can be protected," Yu said. "You should not try to inflate away your debt burden." China could still diversify some of its Treasury holdings into euros or commodities, Yu added.

"Yes, some people say the euro is very weak," Yu said. "OK, weak is good, we'll buy very cheap."

The best outcome for China would still be to negotiate with the U.S. and reach agreement on its Treasury holdings, Yu said. "The borrower should keep their promises," he added. "The U.S. should be a responsible country."