WASHINGTON, March 13 (UPI) -- A fire bell tolled in the night for the American economy Friday: Chinese Premier Wen Jiabao said his country is worried about just how safe its estimated $1 trillion in U.S. Treasury bonds are.
Wen told Friday's session of the National People's Congress in Beijing he was "definitely a little worried" about China's investments in the United States.
"China is indeed the largest creditor of the United States, which is the world's biggest economy. We are extremely interested in developments in the U.S. economy," Wen said, according to a report from China's official Xinhua news agency.
"The Obama administration has adopted a series of measures to counter the international financial crisis. We are expecting these measures to take effect," Wen said. He stressed what he called China's principle of guaranteeing the "safety, liquidity and good value" of the nation's foreign exchange reserves -- the largest of any nation in the world -- and the importance of cautiously investing the reserves and diversifying in many different places.
"On the foreign-reserves issue, the first consideration is our national interest," Wen said. "But we also have to consider the stability of the overall international financial system, as the two factors are interlinked."
Wen did add a reassuring note: "Currently, our reserves are generally safe."
As long as the dollar is strengthening, as it has been lately, China can feel good about its position. However, economists have raised concerns that U.S. President Barack Obama's gigantic economic stimulus package, backed as it is with a massive increase in government debt, could weaken the dollar -- and threaten China's investment.
Xinhua noted that China's foreign exchange reserves soared to an all-time high of $1.95 trillion at the end of 2008, a far higher figure than Japan, which has the second-highest national reserves, worth $1.03 trillion -- just more than half the Chinese figure.
The U.S. Treasury listed China as owning $681.9 billion in U.S. Treasury bonds in November. This figure was far higher than the $585 billion in U.S. bonds it held in September, an increase of well more than 15 percent in only two months.
On the one hand, this increase appeared to mark a boost in confidence in the future of the U.S. economy, even after the September economic crisis erupted on Wall Street and then spread around the world. But on the other hand, it also indicated that the U.S. financial system and government are now far more dependent on Beijing than they were six months ago.
And as one commentator has observed, the effect of China staying away from even one auction of U.S. Treasury bonds would likely be dramatic; it would certainly send a message.
It seems unlikely China will do that in the immediate future as long as the U.S. dollar continues to rise relative to other major international currencies.
Wen has been critical of U.S. economic behavior before on several occasions. He expressed his concern strongly at the World Economic Forum in Davos, Switzerland, last month.
Ultimately, this is in large part a problem of China's making, too. China's economic model has been intimately tied to buying U.S. debt so that U.S. consumers can drive China's growth by funding its exports.
China was happy to benefit from the growing bubble but doesn't now like the results of it bursting. As a result, the country is now going to have to readjust its development model, relying more on domestic consumption. That will require developing a better social safety net so that Chinese can more confidently spend some of their savings.
President Obama and Secretary of State Hillary Clinton certainly recognize the crucial importance of staying on good terms with China. Clinton visited Beijing on her first trip overseas after taking office. And discussing ways to manage trade and financial relations was at the top of her negotiating list.
Human-rights activists and supporters of the Dalai Lama have decried Clinton's unwillingness to publicly champion their concerns in Beijing, but as the old saying goes, "He who pays the piper calls the tune." Anyone who wants the United States to be able to lecture China and put pressure on it about such issues has to recognize that can't happen as long as the U.S. government and economy are so dependent on Chinese financial support and cheap industrial and manufactured imports.
Obama has said he hopes to cut the record annual government deficit that he inherited from President George W. Bush by 50 percent within the next four years. And there is no doubt that senior Obama administration officials take the issue of national fiscal solvency far more seriously than their predecessors under Bush did.
However, Obama's gigantic spending package is far from reassuring to the Chinese and to other major governments around the world. Financial ministers from the Group of 20 are gathering in London this weekend to lay the groundwork for next month's economic summit. There are differences in how they see fit to handle the crisis.
Japan has backed a U.S. position of coordinated moves to support the world economy, but European ministers have been pushing instead for regulation of the financial sector.
Banque de France Gov. Christian Noyer told the Financial Times in comments published Friday that the United States needs to fix its financial system. Noyer said Europe was more advanced in that regard than the United States.
Therefore, Wen's warning, while measured, was of vast importance. It serves notice to the Democratic masters of the 111th Congress as well as to their Republican opponents that their bipartisan, still-dominant ways of doing business through reckless pork-barrel spending as if there were no tomorrow cannot continue. Tomorrow has just arrived.