June 2 (Bloomberg) -- 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 said he is scheduled to meet Geithner today at the Grand Hyatt Hotel in Beijing.
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 will be shooting themselves in the foot if they push this issue too hard,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. “If they are too alarmist and contribute substantially to a dollar and Treasuries sell off, they are going to feel more pain than just about anybody in the world.”
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.
Climbing Deficit
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 narrow the gap to “roughly” 3 percent of gross domestic product from a projected 12.9 percent this year, Geithner said yesterday during a two-day visit to the Chinese capital. He added that China’s investments in U.S. financial assets are very safe, and that the Obama administration is committed to a strong dollar.
“We are going to have to bring our fiscal deficit down to a level that is sustainable over the medium term,” Geithner said yesterday.
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.
‘Buy Cheap’
“Yes, some people say the euro is very weak,” Yu said. “Okay, 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.”
U.S. government securities have tumbled 4.3 percent this year, the worst performance since Merrill Lynch & Co. began tracking returns in 1978, as so-called bond vigilantes drove up yields to punish President Barack Obama for increasing the budget shortfall.
Concerns about international investors have grown as the U.S. Dollar Index weakened 8.6 percent since February and Obama and Federal Reserve Chairman Ben S. Bernanke committed $12.8 trillion to thaw frozen credit markets and snap the longest U.S. economic slump since the 1930s.
Demand for Debt
Goldman Sachs Group Inc., one of the 16 primary dealers required to bid at the Treasury’s debt auctions, estimates that the U.S. may borrow a record $3.25 trillion this fiscal year ending Sept. 30, almost four times the $892 billion in 2008.
Still, for all the hand-wringing over the dollar’s slide, the expanding U.S. deficit and the nation’s AAA credit rating, the bond market shows international demand for American financial assets is as high as ever.
The Federal Reserve’s holdings of Treasuries on behalf of central banks and institutions from China to Norway rose by $68.8 billion, or 3.3 percent, in May, the third most on record, data compiled by Bloomberg show. The Treasury said bidding from foreigners was above average at its $101 billion of note auctions last week.
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