China Warns U.S. Over Spending Perils

It’s not as sexy as Stewart vs. Cramer but the message Chinese Premier Wen Jiaboa sent Friday about reckless spending devaluing the U.S. dollar must have jolted the Obama administration about its orgiastic stimulus investment plans.

“Of course we are concerned about the safety of our assets. To be honest, I’m a little bit worried,” Wen said at a news conference Friday after the closing of China’s annual legislative session. “I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets.”

The White House has every reason to consider financial celibacy. It relies on China to buy U.S. bonds to pay for the $787 billion stimulus plan. China invests $2 trillion in foreign markets, half in U.S. Treasury notes. A weaker dollar would erode the value of those assets.

I have always feared what would happen if China used its leverage and called in those notes. Not to worry, economists tell us. It would destroy the world economy including China itself. Easy for them to say.

The economic and political ties between China and the U.S. are complicated. U.S. corporations complain about unfair trade policies in which China enjoys the upper hand. U.S. Treasury officials accuse China of manipulating its currency value in its favor. But, neither can live without the other.

Wen’s warning sets the stage for Chinese President Hu Jintao’s meeting with President Barack Obama at an April 2 summit in London of the Group of 20 major economies on remedies for the global economic crisis.

Reports the Associated Press:

“China is telling the U.S. to be careful, not to overspend and keep an eye on the dollar,” said Kelvin Lau, regional economist at Standard Chartered in Hong Kong. “There are risks that China cannot control, so they’re depending on the U.S. to maintain fiscal prudence and keep the dollar reasonably stable.”

But economists said his comments reflect fears that higher U.S. budget deficits from Washington’s $787 billion stimulus package could drive down the dollar and the value of China’s Treasury notes.

“Inside China there has been a lot of debate about whether they should continue to buy Treasuries,” said Frank Gong, chief China economist for JP Morgan.

Beijing is trying to increase its leverage at the London G-20 meeting by reminding its partners of its role in financing U.S. spending, Gong said.

“Without China’s buying (Treasuries) and continuing to fund U.S. deficit spending, interest rates could have been much higher. That could be very destabilizing in this very recessionary environment,” he said. “By attracting a lot of attention to this issue, China is already increasing its influence ahead of the G-20 meeting.”

Finance officials from the G-20 meet this weekend. U.S. Treasury Secretary Timothy Geithner is pressing for a new coordinated global stimulus. Japan is supportive but European governments are reluctant to make expensive commitments before they see how current plans are working.

Writes John W. Schoen, senior producer at msnbc.com:

After months of preliminary work, several major fault lines have opened, largely between the U.S. and European countries, say analysts. The Obama administration … has been pressing European countries to boost spending. For their part, the Europeans have been urging quick action on tightening financial regulations.

On Tuesday Federal Reserve Chairman Ben Bernanke outlined the issue facing U.S. financial regulators, but pointedly lowered expectations for the April G-20 summit. “I think it’s asking too much for a meeting like that to come out with detailed proposals in many different areas,” he said…

In response to U.S. calls for more government spending, the EU has said it is doing its part with a package that amounts to between 3 and 4 percent of Europe’s gross domestic product. The $780 billion amounts to about 5.5 percent of the U.S. GDP, but is spread over two years.

While the U.S. is expected to continue to urge European countries to spend more, that will likely be a tough sell. With the exception of Germany, Great Britain and France, most European governments’ finances are already stretched to the limit.

Meanwhile, the president said Friday many families are feeling “incredible pain” but promised the government is providing help through its spending programs. Obama and his advisers prefer to accentuate what little positive news they can scratch from economic indicators.

Consumer spending in January increased over sales during the December holiday season. The trade deficit dropped to $36 billion, lowest since October 2002, as American companies imported less due to the weakening economy.

However, while America’s deficit with many of its trading partners declined sharply, the politically sensitive shortfall with China bucked the trend, rising by 3.5 percent to $20.6 billion. That also could be a concern expressed by Chinese Prime Minister Wen.

The New York Times offers this assessment from Lawrence Summers, Obama’s No. 2 man at Treasury:

Summers acknowledged that huge sums are being borrowed by the U.S. government to support recovery efforts. And while things should get better under Obama’s programs, things could also get worse “if deflation sets in, if GDP (gross domestic product) collapses further,” Summers said.

“If that happens, the magnitude of the federal borrowing, as large as it is, will be dwarfed. It will be far, far larger.”

Again, exactly the fears expressed by the Chinese.

Cross posted on The Remmers Report