Chinese Premier Wan Jiabao Publicly Asks For Reassurance That Their Investement in U.S. Treasuries Will Stay Safe

China increased its stake by 46% to $696 billion in ’08

March 13 (Bloomberg) — China, the U.S. government’s largest creditor, is “worried” about its holdings of Treasuries and wants assurances that the investment is safe, Premier Wen Jiabao said.

“We have lent a huge amount of money to the United States,” Wen said at a press briefing in Beijing today after the annual meeting of the legislature. “I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”

U.S. President Barack Obama is relying on China to sustain buying of Treasuries as his administration sells record amounts of debt to fund a $787 billion economic-stimulus package. Chinese investors have lost money on the securities so far this year, after increasing their holdings 46 percent to $696 billion in 2008, according to Treasury Department data.

“China’s purchases of American debt have been one of the few bolts keeping the wheels on the global economy,” said Phil Deans, a professor of international affairs at Temple University in Tokyo. “If China stops buying where does Obama’s borrowing to fund his stimulus come from?”

Treasuries declined, causing the yield on the 10-year U.S. note to rise six basis points to 2.92 percent at 4:51 p.m. in Hong Kong, according to BGCantor Market Data. The securities handed investors a loss of 2.7 percent in yuan terms this year, according to Merrill Lynch & Co.’s U.S. Treasury Master index. The dollar fell 0.2 percent to $1.2938 per euro.

“Of course we are concerned about the safety of our assets,” said Wen. “To be honest, I am a little bit worried.”

Risky Alternatives

China should seek to “fend off risks” as it diversifies its $1.95 trillion in foreign-exchange reserves, Wen said. Yu Yongding, a former adviser to the central bank, said in an interview on Feb. 10 that the nation should seek guarantees that its Treasury holdings won’t be eroded by “reckless policies.”

Demand for the relative safety of Treasuries has been supported in the past two years as finance companies reported $1.2 trillion in credit losses. China boosted holdings of government debt as it lost of more than $5 billion from investing $10.5 billion of its reserves in New York-based Blackstone Group LP, Morgan Stanley and TPG Inc. since mid-2007.

Currency market moves have been more favorable to holding U.S. bonds this year. Chinese investors who bought Japanese government bonds would have lost 7.7 percent so far this year in yuan terms, compared with a 7.3 percent loss for holders of German bunds, according to the Merrill Lynch indexes.

Shooting Itself

“China won’t sell the U.S. debt now as that will only drive down Treasury prices, hurting not only the U.S. but also the value of its own investments,” said Shen Jianguang, a Hong Kong-based economist at China International Capital Corp., an investment bank partly owned by Morgan Stanley.

U.S. Treasury Secretary Timothy Geithner will defend his spending plans at the Group of 20 meeting near London this weekend. French Finance Minister Christine Lagarde and Germany’s Peer Steinbrueck of Germany want the summit to focus on improving regulation and restraints on the finance industry.

The U.S. trade deficit and the government’s “nearly unrestricted” borrowing led to excess liquidity worldwide and “sowed the seeds” of the financial crisis, the People’s Bank of China said in a report today. The dollar has dropped 17 percent against the yuan since China ended a fixed exchange rate in July 2005. It was little changed at 6.8384 yuan today.

Printing Money

“China is worried that the U.S. may solve its problems by printing money, which will stoke inflation,” said Zhao Qingming, a Beijing-based analyst at China Construction Bank Corp., the country’s second-biggest lender. “If the U.S. can make sure this won’t happen, then China will continue to invest.”

U.S. Secretary of State Hillary Clinton urged China, while visiting officials in Beijing on Feb. 22, to continue buying U.S. debt, which she called a “safe investment.” She didn’t press China on its foreign-exchange policy, backing away from January comments by Geithner that the Chinese government manipulates its currency to boost exports.

China will maintain its policy of seeking a stable yuan, even as gains against the euro and Asian currencies hurt the nation’s exporters, Premier Wen said.

While the yuan has weakened 0.2 percent against the dollar this year, there has been a “drastic depreciation” in the euro and Asian currencies that has put a lot of pressure on Chinese exporters, Wen said. The currency has gained 8.6 percent against the euro this year and 6 percent against the Philippine peso.

Stimulus Plans

“Our goal is to maintain a basically stable yuan at a balanced and reasonable level,” Wen said on the final day of the meeting of the National People’s Congress. “At the end of the day, it is our own decision and any other countries can’t press us to depreciate or appreciate our currency.”

Collapsing exports have dragged the economy to its weakest growth in seven years and eliminated the jobs of millions of migrant workers. Wen reaffirmed China’s target of an 8 percent expansion in 2009 as economies from the U.S. to Japan contract, saying the goal was “difficult but possible” to achieve.

China can add “at any time” to 4 trillion yuan ($585 billion) of stimulus measures to revive the world’s third- biggest economy, Wen said. Gross domestic product expanded 6.8 percent in the fourth quarter, compared with 9 percent for all of last year and 13 percent for 2007.

“We have reserved adequate ammunition,” Wen said, adding that the fiscal deficit is under control and the debt level still safe. “At any time, we can introduce new stimulus.”

Delegates of China’s legislative advisory body suggested that the government diversify away from Treasuries into more risky assets. Jesse Wang, executive vice president of China Investment Corp., said on March 4 that the nation’s $200 billion sovereign wealth fund may invest in “undervalued” commodities.

The Reuters/Jefferies CRB Index that tracks 19 commodities dropped 55 percent from a record high of 473.97 reached in July. Oil prices fell 68 percent from July’s all-time peak of $147.27 a barrel.

Ease the capital requirements

At the heart of the mark to market crisis is a complaint that banks have to write down billions of dollars worth of assets to levels they regard as unrealistically low, which hurts banks’ ability to maintain regulatory capital requirements. To meet the requirements after the write-downs, banks then have to raise new capital. Knowing this, investors have been selling bank stocks to avoid dilution.

So far proposals to solve this problem have focused on either attempting to have the government inflate the market value of the assets, inject new capital into the banks or obscure the accounting rules so banks can go on pretending the asset values haven’t dropped. None of these will work. Buying the assets has proved impossible, the capital injections have their own problems and fiddling with the accounting rules risks making investors even more skeptical of bank balance sheets.

So what do we do? We should simply ease the capital requirements. This can be done by either actually lowering the capital requirements or allowing banks to “mark-up” certain types of assets for the purposes of meeting the regulatory requirements. Instead of indirectly getting at a problem caused by regulatory compliance, we should address it directly. This has a major advantage over all other plans: unlike market pricing or investor confidence, the regulatory requirements are something that are actually in our power to control.

It’s also the most honest and transparent reform we can make. It makes it perfectly clear to the market what the rules of the game are and doesn’t further confuse investors about asset values.

This was an idea we first heard from Jim Chanos, the famous short-seller. Yesterday Holman Jenkins pointed out that Warren Buffett supports it as well. Maybe if we start calling it the “Buffett Plan” rather than “regulatory forbearance” we can actually get some support for the idea.

The Swiss are stirring the fondue

The Swiss National Bank moved to weaken the Swiss franc on Thursday, the first time a big central bank has intervened in the foreign exchange markets since Japan sought to weaken the yen in 2004.

The bank’s move, which sparked fears that other countries could follow suit, comes as the value of the Swiss franc has soared as investors seek a haven from the recent market turmoil. In October, after the collapse of Lehman Brothers, it rose to a record high of about SFr1.43 against the euro, a level it has come close to again in recent weeks.

But it fell to its lowest level this year on Thursday after the SNB said the currency’s strength represented an “inappropriate tightening of monetary conditions” as it battled against a slowdown in the Swiss economy.

“In view of this development, the SNB has decided to purchase foreign currency on the foreign exchange market to prevent any further appreciation of the Swiss franc against the euro,” the central bank said.

The Swiss franc dropped 2.6 per cent to SFr1.5192 against the euro and dropped 3.2 per cent to $1.1894 against the dollar.

Analysts said the move was likely to increase talk that countries were set to engage in a bout of competitive devaluation.

“Let the currency wars begin,” said Chris Turner at ING Financial Markets.

Countries around the world faced with the constraint of zero interest rate levels might feel it was acceptable to intervene to weaken their currencies in order to ease monetary conditions, he said, adding that other export-dependent economies such as Japan would “probably be at the head of the queue”.

Michael Woolfolk at Bank of New York Mellon agreed.

“Market intervention by a major central bank such as the SNB opens up the door for other central banks, namely the Bank of Japan, to follow suit,” he said. “The yen is widely perceived in Japan to be overvalued.”

The SNB also cut its interest rates by 25 basis points, taking its three-month Libor target range down to zero to 0.75 per cent, and announced plans to adopt a quantitative easing approach to monetary policy.

Analysts said the move towards quantitative easing was sparked by a drastic revision to the central bank’s forecast for growth, which is now expected to fall between 2.5 and 3 per cent in 2009, much worse than its previous forecast of a drop of between 0.5 and 1 per cent.

The SNB said economic conditions had deteriorated sharply since its last policy meeting in December and that there was a risk of deflation over the next three years.

“Decisive action is thus called for, to forcefully relax monetary conditions,” the central bank said.

Cool Chart

The wealth of American families plunged nearly 18% in 2008, erasing years of sharp gains on housing and stocks and marking the biggest loss since the Federal Reserve began keeping track after World War II.

The Fed said Thursday that U.S. households’ net worth tumbled by $11 trillion — a decline in a single year that equals the combined annual output of Germany, Japan and the U.K. The data signal the end of an epoch defined by first and second homes, rising retirement funds and ever-fatter portfolios.

Past downturns have been mere blips compared with the losses Americans faced last year, which set them back to below 2004 levels. “In the postwar period, we’ve never had anything other than very modest declines. That life experience led many people to think that houses were a one-way bet,” says Douglas Cliggott, the chief investment officer of Dover Management LLC.

The decline in Americans’ net worth, which was the first in six years, follows an extraordinary boom. Not accounting for inflation, household wealth more than doubled from 1990 to 2000, and then, after a pause, rose nearly 50% before the bust of 2008.

While the value of their assets was falling, Americans’ total debt remained roughly flat. Total household debt increased by half a percentage point in 2008 as families faced tighter lending standards and many started trying harder to live within their means. After years of splurging with an eye on their rising assets, that phenomenon, known as the wealth effect, now cuts the other way, spurring frugality.

Dawn Cortese, a mother of three boys, recalls the giddy days when she worked as an account executive for Pfizer Inc. and its stock price surged on sales of hit drugs such as Viagra and Lipitor.

“I’d look at my 401(k) and we’d feel comfortable, happy…. I was never very cautious,” says Ms. Cortese, 40 years old, of Oakland, N.J. If her boys and their friends wanted burgers or pizza after a roller-hockey game, she obliged. A cleaning lady scrubbed her four-bedroom house and a landscaper mowed her lawn.

Eighteen months ago, Ms. Cortese quit Pfizer to start an event-planning business. She did well initially, turning a Sweet 16 party into a Hollywood set with lights and megaphones one weekend, or a retirement party into a Country-and-Western affair the next. But last fall, business dried up. Her party props began to collect dust in the basement.

She has moved on to a new business: selling skin-care products through Arbonne International LLC, mostly through word of mouth and catalog sales.

Ms. Cortese’s husband, Chris, says his job at a corporate-trade company is relatively stable. But the two are looking to get back on a firmer financial footing.

They’ve put their house, a gray McMansion in a development carved out of a mountain, on the market, for $799,999 — $100,000 less than it was worth a year ago, Ms. Cortese says. The family’s total portfolio, including stocks, retirement plans and college funds, is down 35%, the Corteses say.

Skoal

STOCKHOLM: For Sweden, tiny Latvia, Lithuania and Estonia are too big to fail.

Sweden’s banks plowed billions of kronor into the three booming but small countries across the Baltic Sea over the past decade. But severe recessions in the Baltic states are turning them into the Swedish equivalent of subprime U.S. mortgages — once favored investments that are now in decline.

For the Swedes, the Baltic crisis echoes the one that faced banks in their country in the early 1990s, when bold choices early in constructing a bailout paid off handsomely. That history gives them confidence they can pull off the feat again with the failing finances of entire countries.

“There is a strong feeling from our side that we have a political responsibility to do whatever we can to help them,” Anders Borg, the Swedish finance minister, said during an interview. “They are new democracies; they are part of our economic region.”

This deep sense of ownership of the Baltic success story is driving Sweden to spend ever-more money in the name of its own financial interests, as well as a broader desire in Europe to avoid a new East-West divide.

How it will play out politically at home remains to be seen. Many believe some mixture of Swedish money along with Baltic well-being will evaporate before the crisis passes.

“I don’t think we’ve seen the real test yet, which is when you put a large amount of Swedish taxpayer money into the Baltics,” said Torbjoern Becker, the director of the Stockholm Institute of Transition Economics. Sweden’s Baltic commitments, he said, are risking a heated debate similar to the one in the United States when it granted a $20 billion loan to Mexico in 1995 during a currency crisis there.

Swedish banks have loaned an amount equivalent to roughly 20 percent of its gross domestic product to the Baltic countries, an amount that only a few years ago looked like a savvy bet on their stormy growth.

Now, according to Danske Bank, the loans could cost Sweden a total of 2 percent to 6 percent of GDP over several years, depending on the severity of the recessions that are now in full swing in the Baltics, as Baltic borrowers default en masse. This year, economies in all three Baltic countries could contract 6 percent to 10 percent, exacerbating the pain for Swedish banks and driving them further into the arms of their own government.

Bo Lundgren, head of the Swedish national debt office, said the course of the Baltics would be a crucial factor in the stability of the Swedish financial system. But as a grizzled veteran of Sweden’s crisis in the early 1990s, he said the country could handle the shock. “You cannot rule out need for further capital injections,” Lundgren said. “If state support is needed we are well prepared.”

The effort to support the Baltic countries continues a long stretch of Swedish involvement with the Baltics that goes back centuries.

Swedish kings controlled the Baltics for a time and built universities there. More recently, Carl Bildt, a former prime minister of Sweden who is now its foreign minister, supported Baltic independence movements in the 1980s, as did Borg, then one of Bildt’s young staffers. When the Baltic nations were free from Soviet domination, Sweden became a fierce advocate of their integration into European institutions.

Sometimes the ties are even familial. Lundgren and his wife have an adoptive son from Estonia.

That may be one reason why the strong Scandinavian presence is fairly uncontroversial in the Baltics. The Russian occupation of the three countries for much of the 20th century makes Swedes seem rather benign.

“You can find differences if you want — Swedes are Swedes and Estonians are Estonians,” said Juhan Parts, Estonia’s economy minister. “But there are no worries here about losing independence or economic power.”

Still, Swedish banks contributed to the Baltic crisis by feeding years of a debt-fueled boom in real estate and construction there. The heady feel of newfound wealth underpinned free-spending habits that led to big current account deficits in all three countries, and hence an addiction to foreign capital.

With the real estate bubble now deflating, Swedish banks are left with unpaid mortgages and sour consumer loans. Swedbank, the Swedish bank most exposed in the Baltics, has had its loan-loss rate quadruple in the past year.

Sweden’s first line of defense has been to embrace the Baltics through its own banks. The government passed its own rescue package in the autumn that included 1.5 trillion kronor, or $173 billion, to guarantee new issues of Swedish bank debt, a portion of which was to be used to recapitalize banks that had heavy losses.

“We have declared to our banks that they are supposed to behave responsibly — to perceive these Baltic countries as their home market,” Borg said. “We have set up no hindrances, no regulations, no demands that prevents them from using the capital that we are providing to stabilize their subsidiaries and branches in the Baltic countries.”

But recapitalizing Swedish banks to keep credit flowing in other countries is no easy feat.

Swedbank, which gets 17 percent of its revenue from the Baltics, has already tapped the government program for guarantees, and has raised new capital through private offerings. But it is leery about new lending in countries now in the thrall of a painful contraction.

Mikael Inglander, Swedbank’s chief financial officer, said “shareholders would probably not appreciate it if we use their money to rescue countries.” And he noted that lending, in any recession, generally declines.

“We try to act responsibly,” Inglander said. “But it is not possible for any player to make the market perform in a certain way.”

The government is also helping to recapitalize Nordea Bank; it has been a shareholder since the bank was nationalized during Sweden’s crisis of a decade ago.

Skandinaviska Enskilda Banken, better known as SEB, the big Swedish bank that is controlled by the Wallenbergs, the first family of Swedish business, has avoided going to the government.

Sweden also has been kicking in ever-larger sums to international efforts to help the Baltic countries meet their obligations, not the least to Swedish banks.

It is contributing more than €1 billion, or $1.28 billion, of the €7.5 billion rescue package for Latvia that was put together in December with the International Monetary Fund and others. Two weeks ago, it agreed to trade the equivalent of $1.1 billion Estonian kroons for Swedish kronor — essentially a large leap of faith since Sweden was swapping its own currency for one under immense pressure.

Lars Christensen, a senior analyst at Danske Bank who studies the region’s economies, used the metaphor of the region’s favorite spirit to make the point that, one way or another, Sweden and its banks would suffer for the Baltic binge.

“It’s like drinking a bottle of vodka and saying, ‘Gee, how do I avoid a hangover?”‘ Christensen said. “You can’t.”

Differences hacking the world into the drink

A rift between Europe and America over the crux of the G20 summit was last night threatening Gordon Brown’s hopes for a deal to rescue the world economy.

The size of the challenge facing the British Government in bringing together world powers was emphasised in a candid admission by Britain’s most senior civil servant that it was proving “unbelievably difficult” to liaise with the Obama Administration to prepare for the meeting.

There was also growing scepticism over Mr Brown’s call for at least $200 billion for the International Monetary Fund to bail out cash-strapped nations, with no indication that China would come up with the bulk of the funds as some in No 10 hope.

A simmering row about the whole point of the G20 meeting on April 2 burst into the open when Larry Summers, chief economic adviser to President Obama, called on other countries to follow America’s lead in pumping even more money into stimulus plans to revive the world economic system.

The United States’ stimulus package of $787 billion is equivalent to about 5.5 per cent of its annual economic output, although it is spread over three years, whereas the EU has struggled to reach agreements on a sum that barely reaches 1.5 per cent of its total GDP.

Mr Summers’s plea was attacked by Jean-Claude Juncker, the Luxembourg Prime Minister, who heads the eurogroup of single currency countries. He declared: “The 16 euro-area ministers agreed that recent American appeals insisting that the Europeans make an additional budgetary effort to combat the effects of the crisis was not to our liking.”

Mr Juncker suggested that the eurozone countries would rather adopt a wait-and-see approach than rush to incur even more debt.

His outspoken words were followed by mystification from Germany. Peer Steinbrück, the German Finance Minister, speaking after EU finance ministers met in Brussels, said: “There was a significant amount of bewilderment about this in our discussion.”

There were the first signs of expectations being managed in Downing Street yesterday as the EU-US position became clear. Mr Brown was still hoping for a “grand bargain” from the summit, a source said, but the message yesterday was on how difficult it could be to achieve one. “We are by no means talking it down but I do not think anyone is suggesting the world’s problems can be solved in a single day,” a government source said.

Meanwhile, in remarks to a Civil Service conference that he probably did not expect to be reported, Sir Gus O’Donnell said that No 10 was finding it “unbelievably difficult” to prepare with the US. The Cabinet Secretary was speaking about the advantages of a permanent civil service and the difficulties of dealing with a Government with hundreds of appointees. “There is nobody there,” Sir Gus said. “You cannot believe how difficult it is.”

Another official said that getting the rest of Europe, let alone China, to do more in the way of fiscal stimulus was “not going to be straightforward”.

Alistair Darling will have the task of trying to steer the G20 back on track in preparatory talks of finance ministers in London on Friday and Saturday. But Mr Brown faces a hard battle next week at the European Council heads of government meeting, where EU countries plan to bind his hands over their objectives for the G20.

A spokesman for the Government urged the EU yesterday to present a united front. “We believe that the EU needs to work together to bring about the recovery we need,” he said.