What a change. Is it a reflection of changing global order? Maybe, if not certainly.
As recent as in late January (refer my article http://in.rediff.com/money/2009/jan/30bcrisis-tough-times-ahead-as-us-moves-towards-protectionism.htm) Mr. Geithner accused China of manipulating its currency. Now it is China’s turn to get even. Its premier Wen Jiabao openly accused the US of mismanaging its finances and hence expressed his concern about the value of Chinese holding of US treasuries.
In late January itself Wen blamed the U.S.-led financial system for the world's deepening economic slump. And now an even sharper rebuke as the Chinese government is clearly worried about the safety of its nearly $1trillion credit to the US government.
"We have lent a huge amount of money to the U.S., so of course we are concerned about the safety of our assets," Mr. Wen said in response to a question at his annual news conference. "Frankly speaking, I do have some worries."
Not surprising since China has now overtaken Japan as a country having maximum appetite for US treasuries.
Source: US Treasury
US response to the concern was swift and on expected line. "There's no safer investment in the world than in the United States," said presidential spokesman Robert Gibbs. This was followed by assurance from White House officials that US would embark on the path of fiscal prudence once the crisis blows over.
Surely the US is concerned about this development. Given their increasing dependence on Chinese subscription to their treasuries to help fund their fiscal measures, they are a worried lot. Worried that the Chinese tap might reduce its force of spewing out the dollars.
On the other hand, the Chinese worry is justified given that the US is in its deepest recession probably since the last Great Depression, its deficit is rising and yet there is no certainty that all their pimp priming measures will rescue the economy anytime soon.
Clearly, China is facing a dilemma. If it starts selling treasuries, the treasury market will collapse lowering the value of the Chinese investment. If China keeps on accumulating US debt, the risk profile of their reserves will rise. While the worry is real, China is not expected to start selling treasuries. However, with shrinking trade deficit, China’s ability to accumulate US treasuries will also be less. Nevertheless, this development clearly shows the increasing clout that China now is now able to command in the world market.
We are living in interesting times indeed.