(emphasis mine) [my comment]

MARCH 13, 2009
Wen Voices Concern Over China's U.S. Treasurys
By ANDREW BATSON and ANDREW BROWNE


Premier Wen Jiabao, right, said China is concerned about the value of its U.S. Treasury holdings.

BEIJING -- Premier Wen Jiabao voiced confidence in China's economy, saying his government's finances give it room to spend even more to support growth if needed, but expressed concern about the outlook for the U.S. and the safety of its Treasury bonds.

The forceful comments from Mr. Wen's annual press conference -- a rare opportunity for domestic and foreign reporters to ask a top Chinese official questions directly -- helped depress the U.S. dollar and prices of U.S. Treasurys in Asian trading Friday.

The public airing of his concerns reflect how the relationship between China and the U.S. has been evolving under the pressure of the financial crisis. For years the U.S. has pressed China to change the way it runs its economy, such as by opening up its financial system. But in the last year China's government has been increasingly vocal about what it sees as U.S. economic mismanagement. And as the U.S. government's largest creditor, it has become more assertive in trying to ensure its interests receive a hearing.

"We have lent a huge amount of money to the U.S., so of course we are concerned about the safety of our assets. Frankly speaking, I do have some worries," Mr. Wen said in response to a question. He did not offer specific suggestions on economic policy to the U.S. government, but called on it to "maintain its credibility, honor its commitments and guarantee the security of Chinese assets."

Mr. Wen did indicate that China would not be rash in making changes to its $1.946 trillion stockpile of foreign reserves, much of which is in U.S. dollars. While China is naturally looking out for its own interests, it will "at the same time also take international financial stability into consideration, because the two are inter-related," he said.

In that vein, Mr. Wen also pointed out that China hasn't pushed down the value of the yuan, despite pressure on its exporters, and repeated his government's commitment to currency stability. The yuan has hovered around 6.84 to the dollar since July 2008, but Mr. Wen noted that because the dollar has risen against other Asian and European currencies, the yuan has actually become stronger overall. [This shows how the yuan that is supporting the dollar.]

He said China alone would decide where the yuan goes from here. "No country can pressure us to appreciate or depreciate" the currency, he said.

Despite the rising external challenges, Mr. Wen reaffirmed his belief that China should be able meet its traditional target of economic growth of around 8% this year. He said market expectations last week of another stimulus package were based on "rumors and misunderstandings," and that China's announced program of four trillion yuan in investments over two years will help meet "both short-term and long-term needs."

China's government is planning on an eightfold expansion of its budget deficit this year, to around 3% of gross domestic product, to fund the stimulus program. Mr. Wen said government debt remained at a manageable level and that conservative budgeting in previous years means China is well positioned to do more if necessary.

"We have already prepared plans to deal with greater difficulties, and have reserved adequate ammunition [ie: we will spend whatever it takes to reach 8% growth.]. We can introduce new stimulus policies at any time," he said.

Mr. Wen said that China is also closely watching to see the effects of the policies taken by U.S. President Barack Obama aimed at returning the world's largest economy to health. Chinese foreign minister Yang Jiechi was also in Washington this week to discuss how the two countries can cooperate on economic policy, among other issues.

A test of that cooperation is quickly approaching. U.S. Treasury Secretary Timothy Geithner this week called on the Group of 20 – a gathering of the world's largest developed and developing economies – to increase funding for the International Monetary Fund by up to $500 billion to help combat the financial crisis [Geithner wants world to help US print money.]. Achieving that sum likely will depend on getting agreement from countries that hold large foreign exchange reserves, such as China and Saudi Arabia.

Ahead of a preparatory meeting of G-20 financial officials this weekend near London, Mr. Wen said pointedly that "increased funding for the IMF is not a question for just one country" but for all member nations. He also repeated China's desire to see reforms to the IMF that give more clout to developing nations.

The Chinese premier's annual press conference is held each March at the close of the country's legislative session. Mr. Wen was asked about a broad range of subjects, from relations with France and Russia to the possibility of political reform in China and the sensitive issue of Tibet.

Mr. Wen used harsh language against the Dalai Lama, Tibet's spiritual leader, who accused the Chinese government this week of turning the Himalayan region into a "hell on earth." He said talks between Beijing and the Dalai Lama, which took place last year without making any progress, could only resume if the Dalai Lama is "sincere."

Despite blanket security in Tibet around the 50th anniversary of the Dalai Lama's flight from Tibet, Mr. Wen said that "the situation in Tibet on the whole is stable. The Tibetan people hope to live and work in peace and stability."

China Daily reports that US tries to assure China's concern about its assets in US.

US tries to assure China's concern about its assets in US
(Xinhua)
Updated: 2009-03-14 09:27

US President Barack Obama's top economic advisor Friday tried to assure China's concern about the safety of its assets in US, saying the US would be "sound stewards of the money we invest".

"This is a commitment that the president has made very clear -- we need to be sound stewards of the money we invest, [The US “needs to” be “sound stewards of the money we invest”. The US also “needs to” fix its trade deficit, budget deficit, social security funding deficit, dependence on foreign oil, etc... The US knows exactly what it “needs to” do, and, in a few decades, it might maybe, possibly start thinking about doing it.]" said Lawrence Summers, the president's director of the National Economic Council, in a speech at the Brookings Institution, a leading think tank in the United States.

Chinese Premier Wen Jiabao said earlier Friday he is "a little bit worried" about the safety of Chinese assets in the United States, urging the US government to ensure the security of those assets.

"We lent such huge fund to the United States and of course we are concerned about the security of our assets and, to speak truthfully, I am a little bit worried," said Wen at a press conference after the close of the annual Chinese parliament session on Thursday.

China has invested its huge foreign exchange reserves in low[high]-risk but low-yield assets, such as US government bonds, to play it safe [because it wants to lose money].

According to the US Treasury, China held $681.9 billion worth of US government bonds as of November.

China Daily reports that Risk control No 1 concern for China's forex management.

Risk control No 1 concern for China's forex management
By Hu Yuanyuan (chinadaily.com.cn)
Updated: 2009-03-13 11:58

China will keep risk control as the primary concern when using the foreign exchange reserves [then why has China bought treasuries?], Premier Wen Jiabao said today at the press conference after the second session of the 11th National People's Congress closed.

"When managing the foreign exchange reserves, China will stick to the principle of 'safety, liquidity and appreciation'," said Wen, adding that China will also take the stability of the global financial market into consideration.

China's foreign exchange reserves hit a record $1.95 trillion at the end of 2008 [real number is more like 2.2 trillion], the largest in the world and far exceeding those of Japan, the second-largest foreign exchange holder with $1.03 trillion. [China and Japan are going to lose a lot of money.]

My reaction: China is nervous about its treasury holdings.

1) Chinese Premier Wen said Friday he is "a little bit worried" about the safety of Chinese assets in U.S.

2) The forceful comments from Mr. Wen's annual press conference helped depress the US dollar and Treasuries in Asian trading Friday.

3) Obama's top economic advisor Friday said U.S. would be "sound stewards of the money we invest."

4) China held 681.9 billion dollars of U.S. government bonds as of November.

5) Because the dollar has risen against other Asian and European currencies, the yuan has become stronger overall in the last six months.

6) China's government is planning on an eightfold expansion of its budget deficit this year.

7) At the end of 2008, China's foreign exchange reserves are $1.95 trillion, Japan's reserves are $1.03 trillion.

8) U.S. Treasury Secretary Timothy Geithner this week called on the Group of 20 to increase funding for the International Monetary Fund by up to $500 billion to help combat the financial crisis.


Conclusion: With the US printing money like there is no tomorrow, China should be worried panicked about their enormous treasury position.


About the dollar rally

As I see it, there are two three key factors behind the recent dollar rally:

A) European banks desperate for dollars so they don’t have to sell assets at “depressed prices” (ie: market prices) and recognize losses.

B) China’s dollar peg. Since the US and China both trade in dollars, together they form a “dollar zone”. This “dollar zone” is actually running a small trade surplus with the rest of the world because China’s trade enormous trade surplus is offsetting the US’s enormous trade deficit.

C) A misguided “flight to safety”. This includes the ridiculous notion that the euro is less safe than the dollar because they are printing less money.

None of these factors are sustainable.