Tags: China Officials Shared Concerns About Asset Bubbles With U.S.

China Officials Shared Concerns About Asset Bubbles With U.S.

Thursday, 30 Dec 2010 10:06 AM

Chinese officials shared concerns about growing asset bubbles in their nation’s economy in meetings in January with the U.S., according to American diplomatic cables released by Wikileaks.

“On an overheating economy, Vice Minister Liu He pointed to asset bubbles as a potential problem for China’s recovery,” said the unclassified cable dated Feb. 10 from the U.S. Embassy in Beijing and posted by Wikileaks on Dec. 26. Liu, a senior adviser who works with the Central Leading Group on Financial and Economic Affairs, “did not yet see the problem as serious” while also noting that people were withdrawing money from banks to invest in assets, the cable said.

Neither Chinese nor U.S. officials approached by Bloomberg News have confirmed the cables’ authenticity. The Wikileaks website doesn’t disclose or describe sources.

Liu also said that China’s policy of linking the yuan to the dollar “was no longer an economic issue, but more of ‘a political issue for both sides,’” according to the cable. He was quoted as saying that exports had helped China keep its unemployment rate and political system stable.

“We will not comment on the specifics leaked by the Wikileaks website,” Foreign Ministry spokeswoman Jiang Yu said at a briefing in Beijing today. Meng Jian, an aide to Liu, didn’t immediately have a comment on the cable.

The meetings between U.S. and Chinese officials took place Jan. 25-28 in the run-up to the Strategic and Economic Dialogue in May in Beijing.

Accelerating Inflation

The cable, sent to the U.S. State Department and Commerce and Treasury departments, shows increased attention over whether China’s economy would overheat and spark inflation, which in turn could jeopardize growth. Inflation hit a 28-month high in November, a Chinese government report showed.

State Department spokesman Mark Toner cited a department policy of not commenting on specific cables. U.S. Treasury spokeswoman Natalie Wyeth also declined to comment on the documents.

The People’s Bank of China this week lifted its benchmark lending and deposit rates by 25 basis points, the second increase this quarter. Li Wei, of Standard Chartered Plc in Shanghai, is among analysts who now predict China may allow the yuan to appreciate faster next year to combat rising prices.

Currency policy is a point of tension between the U.S. and China. Lawmakers in Washington say an undervalued yuan is hurting U.S. manufacturers and Senate Foreign Relations Committee Chairman John Kerry, a Democrat from Massachusetts, has said Congress may propose legislation “with teeth” to impose sanctions if the yuan doesn’t rise fast enough.

Yuan’s Gains

Treasury Secretary Timothy F. Geithner has urged faster gains against the dollar. The yuan has climbed 3.4 percent since June, when officials in Beijing ended a crisis policy of fixing the exchange rate at about 6.83 per dollar to protect exporters. Today, it touched 6.6011, the highest since 1993.

Private Chinese economists were expecting gains to accelerate, according to the Feb. 10 cable. It cited China Construction Bank Corp. chief economist Hua Ercheng, named in the document as Hwa Erh-cheng, predicting that the currency would rise about 3 percent in 2010 and 5 percent in 2011. He said China was likely to let the yuan rise over time, rather than in one big move, and that the government “will not be influenced by a dialogue,” the cable said.

Yu Baoyue, a press officer at CCB, said Hua no longer works for the bank and didn’t know where he could be reached.

Currency Debate

The February cable and a separate March 2009 cable, also posted Dec. 26 by Wikileaks, detail a lack of movement on the currency debate. In the January meetings, the February cable says, Chinese finance ministry officials “demonstrated little outward receptivity” to U.S. calls for a stronger yuan and there was debate over how the issue should be listed as an agenda item.

In Beijing, the finance ministry’s press officer decline to immediately comment today, asking for faxed questions.

The March 20, 2009, cable shows that Chinese officials had been reluctant for some time to discuss changing the yuan peg. That month, Treasury Acting Assistant Secretary Mark Sobel brought up the issue with Hu Xiaolian, deputy governor of the People’s Bank of China and director of the State Administration of Foreign Exchange, also known as SAFE. The Chinese rebuffed him, citing concerns that the Federal Reserve’s monetary policy stance could spark inflation.

Treasury Holdings

That cable also included concerns from Chinese officials about the extent of their holdings in Treasury securities and other U.S. investments. The U.S. cable says that according to its sources, SAFE “suffered large losses” when Lehman Brothers Holdings Inc. collapsed in 2008 and was in the midst of a “huge debate” over how to handle U.S. assets going forward.

A press official for SAFE declined to comment today.

“Comments of this sort do not imply that China will attempt to dump its U.S. Treasury holdings,” the cable said.

“Rather, they indicate that China’s leaders are aware that, while they can purchase more or fewer USD-denominated assets at their margin, their holdings are so enormous that they cannot reallocate the currency composition of their portfolio to any meaningful extent without leading to large capital losses and thus further public — and internal — criticism.”

That cable also mentions a Feb. 27 meeting between Treasury’s Robert Dohner, deputy assistant secretary for Asia, and Citigroup Inc. economist Shen Minggao, then chief economist for Caijing, a Chinese-language business magazine. Shen suggested that the U.S. consider a bilateral agreement with China “in which China would continue providing funds to the U.S. in exchange for some sort of hedging scheme,” the cable said. Shen didn’t immediately answer phone calls or an e-mail from Bloomberg News today.

WikiLeaks, an organization that publishes government documents on its website, has been posting what it says are more than 250,000 State Department cables. Secretary of State Hillary Clinton said Nov. 29 the disclosures could hurt negotiations and endanger individuals.

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Chinese officials shared concerns about growing asset bubbles in their nation s economy in meetings in January with the U.S., according to American diplomatic cables released by Wikileaks. On an overheating economy, Vice Minister Liu He pointed to asset bubbles as a...
China Officials Shared Concerns About Asset Bubbles With U.S.
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