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Why Bush will stand with Hu Jintao at the opening of the Beijing Olympics

China's government, which invests up to a third of its $1.68 trillion in currency reserves in [US] Treasuries, is "not smart'' to invest in U.S. debt and should seek higher returns, a former legislator said [June 13 2008]. "I don't think it's a smart move to invest in U.S. bonds,'' said Cheng Siwei, former vice chairman of the National People's Congress, China's legislature, at a Beijing conference."We need smart capitalists to invest ourselves,'' instead of lending money to American investors and earning interest, he said.

Cheng's remarks on Nov. 7 [2007] that China should improve the structure of its foreign reserves by favoring stronger currencies helped pushed the dollar to record lows against the euro. He said today his comments represented his "personal opinion, not the government's policy.''

Countries in Asia have amassed a record $4.2 trillion in foreign exchange reserves since the 1997-98 financial crisis, seeking to protect their economies from a similar regional currency slump. China set up China Investment Corp., a $200 billion sovereign wealth fund, in September [2007] to seek higher returns on its holdings.

China's government should invest funds "directly'' abroad, Cheng said today without elaborating. Asked whether he's urging the Chinese government to diversify from Treasuries, Cheng said "it's an unavoidable choice now "to buy U.S. bonds.

More at: China 'Not Smart' to Invest in U.S. Bonds', Cheng Says, Belinda Cao, June 13 2008, Bloomberg

China is adding to its holdings of U.S. assets, data from the U.S. government showed yesterday, easing concern the Asian nation will sell dollar investments. Total holdings of U.S. equities, notes and bonds among foreign investors rose by a net $115.1 billion in April [2008] from $79.6 billion the previous month, the Treasury Department said yesterday in Washington. China's holdings of Treasuries gained $11.4 billion to $502 billion, holdings of U.S. agency debt rose $11.9 billion and U.S. corporate bond investments increased $6.9 billion, data showed.

"China was a big buyer of U.S. securities,'' wrote Win Thin, a New York-based senior currency strategist at Brown Brothers in a research note today. China is the second largest holder of U.S. Treasuries after Japan, investing almost one-third of its $1.68 trillion in currency reserves in U.S. government debt. The data showed "there has been no sign that either China or Japan are decreasing dollar holdings,'' Win wrote in his report. "Rather the data continued to show diversification by the two within U.S. securities.''

More at: China Adds to Holdings of U.S. Assets, Buys More Agency Debt, By Patricia Lui, June 17, 2008, Bloomberg

China's central bank may raise key interest rates this week for the first time in 2008 after the bank's chief vowed to formulate "stronger policies'' to restrain food and energy prices, which are near a 12-year high. The People's Bank of China may raise the key one-year lending rate from 7.47 percent, according to 11 of 15 economists surveyed in April by Bloomberg News. The deposit rate will climb from 4.14 percent, 10 economists said.

China's central bank may formulate "stronger policies'' to tackle inflation because higher energy prices will push the consumer price index higher, bank Governor Zhou Xiaochuan said in New York on June 20 [2008]. The Beijing-based bank held off raising borrowing costs this year to prevent widening the gap with U.S. rates and drawing money into China's financial system. China may resume lifting rates as energy and food became more expensive.

"Investors are panicking,'' said Zhang Ling, who manages $1.1 billion at ICBC Credit Suisse Asset Management Co. in Beijing, after China's key stock index plunged 5.5 percent on Friday. "There's speculation in the market that the central bank will raise interest rates.''

The CSI 300 stock index fell 1.2 percent last week, putting the benchmark on course for its worst month on record. The three- year-old benchmark measure has slumped 47 percent this year amid concern official measures to control inflation will hurt earnings growth. The central bank has ordered lenders to set aside a record amount of money in reserves after raising interest rates six times last year.

The profit among Chinese industrial companies grew in the first five months at half the pace of a year earlier on record oil and coal prices, increasing the likelihood that economic growth will slow.

More at: China May Raise Interest Rates to Curb Inflation: Week Ahead, By Eugene Tang, June 30, 2008, Bloomberg

See also: Is China quietly dumping US Treasuries? Ambrose Evans-Pritchard , Telegraph, 06/09/2007

Asian central banks like China's have become America's bankers, financing its excesses through good times and bad. It's now up to Asia to decide whether to extend the U.S.'s line of credit. The U.S. should be warned that the odds are moving less and less in its favor.

More at: If China Shuns Dollar, Look Out U.S. Bonds: William Pesek Jr. Jan. 28, 2005, Bloomberg

Most publicized American forecasters tend to be Panglossianly bullish. They only ever see the upside, usually of the American economic prospects, but many of their China watchers seem to be wearing the same rose-colored glasses, seemingly oblivious to how co-dependent the two economies are.

For a more detached viewpoint, to look at the two economies separately is like looking at the two wheels of a bike without looking at the frame that connects them. Looking at the US-China bi-cycle in motion exacerbates the separate notes of caution that international agencies have sounded against each country. In fact, there is an inherent and additional precariousness in this double bubble act.

What happens when two bubbles collide? Do they both burst, or do they coalesce and become an even bigger bubble - which will eventually burst even more spectacularly? That is the question posed by the growth figures from both the US and China, whose growth rates are tied in ways that neither seems to want to admit too loudly.

Even before this week's [Jan 23 2004] figures on China's explosive 9.1 percent growth in 2003, which many commentators thought actually understated the reality, the United Nations' annual economic report had identified the People's Republic of China as the locomotive for growth in Asia (with a nod to India), and added that the US with its 4 percent growth rate will do the same job for the industrialized world. But once again, the question must be asked - will these two Chinese and US engines run in the same direction indefinitely, or will they begin to diverge? Indeed, even more scarily, will they have a head-on collision and involve the world economy in the mother of all train-wrecks?

More at: China-US: Double bubbles in danger of colliding, By Ian Williams, Asia Times Online, Jan 23, 2004

See also: Reporters Guide to covering the Beijing Olympics

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