Wen Jaibao…..unhappy about falling Dollar

Yu Yongding of the Chinese academy of social sciences today told the Western media that US securities could no longer be regarded as a safe part of its debt ownership portfolio. Specifically, he observed that “the scary trajectory of budget deficits and a growing supply of U.S. dollars put their value at risk….US treasuries are not safe in the long run….Only God knows how much of the value China has stored in U.S. government securities will be left in the future when China needs to run down its reserves.”

The Slog understands that Yu had the backing of Beijing’s central bank for his comments. Zhang Ming, deputy chief of the International Finance Research Office at the Chinese Academy of Social Sciences, spoke in a similar vein when he said that “The U.S. government has strong incentives to reduce its real burden of debt through inflation and dollar devaluation. Whichever way it is, the Yuan-recorded market value of Treasuries will fall, causing huge capital losses to China’s central bank.”

This is a reference to China’s recent decision to allow for ‘managed flotation’ of the Yuan.

Four months ago, Chinese Premier Wen Jiabao urged the U.S. to take “concrete steps” to reassure investors about the safety of dollar assets. Apparently, the Obama administration’s ‘lax’ monetarist control since then has not impressed Beijing. With Bernanke about to announce more QE for the US economy, China’s remonstrations about effective devaluation of the Buck are likely to become more shrill.

The basic point of all this is to tell the Americans “We’ve got your number, chummy”. With elections coming up, it’s not going to play well for Obama – but the very fact that the insult has real grounds for being delivered reduces faith in the Dollar as a major currency. Beijing may be in danger of shooting itself in the foot on this one.