Obama soothes China on multi-billion-dollar US debt

President Barack Obama said that China could have "absolute confidence" in the American economy, after Beijing pointedly questioned the safety of its huge haul of US government debt.

business Updated: Mar 15, 2009 09:16 IST

President Barack Obama said on Saturday that China could have "absolute confidence" in the American economy, after Beijing pointedly questioned the safety of its huge haul of US government debt.

Obama took up comments by China's Premier Wen Jiabao on Friday, which represented a rare assessment by Beijing on the health of the US economy and the prospects for China's hundreds of billions of dollars in Treasury bonds.

"Not just the Chinese government, but every investor can have absolute confidence in the soundness of investments in the United States," Obama said after meeting Brazilian President Luiz Inacio Lula da Silva at the White House.

"There is a reason why even in the midst of this economic crisis you have seen actual increases in investment flows in Washington in the US."

"I think it is a recognition that the stability not only of our economic system but also our political system is extraordinary."

Obama said that his comments were applicable to both US Treasury instruments and investments in the US private and industrial sectors.

Wen told reporters in Beijing on Friday that he was concerned about China's huge stake in the US economy as it endures the worst crisis in generations.

"We have lent huge amounts of money to the United States. Of course we are concerned about the safety of our assets," Wen said.

"To be honest, I am a little bit worried and I would like to... call on the United States to honor its word and remain a credible nation and ensure the safety of Chinese assets."

Wen's comments caused a stir in global markets, and were the latest disturbance to the critical US-Chinese relationship early in Obama's administration.

Last week, military tensions rose after the United States said Chinese boats harassed the US Navy surveillance vessel Impeccable in the South China Sea, forcing the ship to take emergency action to avoid a collision.

Beijing said the vessel was on a spying mission.

China also balked at US comments on the human rights situation in Tibet - but both sides tried to smooth over the row with Foreign Minister Yang Jiechi's visit to the White House on Thursday.

Beijing held 727.4 billion dollars in US Treasury bonds at the end of last year, just ahead of Japan, the holder of 626 billion dollars in bonds, according to US government data.

As the largest creditor to the United States, China is "extremely interested in developments in the US economy," Wen said.

Analysts say a loss of confidence in US Treasury securities could cause a dramatic drop in the dollar and force Washington to pay higher interest rates.

In February, Secretary of State Hillary Clinton asked China to keep on buying US debt, saying it could help jumpstart the flagging US economy and stimulate imports of Chinese goods.

"By continuing to support American Treasury instruments the Chinese are recognizing our interconnection. We are truly going to rise or fall together," Clinton said.

Most of China's foreign exchange reserves, which reached 1.95 trillion dollars by the end of 2008, is believed to be held in the greenback.

White House spokesman Robert Gibbs said Friday that "there's no safer investment in the world than in the United States."

Obama rolled out an audacious 3.55-trillion-dollar budget proposal last month that bristles with economic reforms and spending on healthcare, climate change and education.

The budget forecasts a 1.750 trillion dollar deficit in fiscal 2009, but foresees that figure falling to 1.171 trillion dollars in 2010.

The Chinese reportedly are concerned about the enormous amount of borrowed money, including Obama's nearly 800-billion-dollar stimulus, being used to boost US growth.

Concerns are flaring in China that the stimulus plan could hurt dollar-denominated assets, with some observers urging China to cut US Treasury holdings, the official Xinhua news agency said last month.

Domestic critics have charged that, as a developing country, China should be investing at home instead of subsidizing the world's richest country, or else diversifying into other foreign assets.

First Published: Mar 15, 2009 09:13 IST