The story of the hour in global financial circles: China's prime minister, Wen Jiabao, is "worried" about the value of his country's huge investment in United States Treasury bonds.
"President Obama and his new government have adopted a series of measures to deal with the financial crisis. We have expectations as to the effects of these measures," Mr. Wen said. "We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried."
Of course he's worried. China owns about $1 trillion worth of Treasury bonds, and a collapse in the value of the dollar would be a devastating blow to China's foreign reserve portfolio. If Wen wasn't worried, you'd have to wonder about his acuity. A great deal is riding on whether Obama can steer the U.S. safely out of its current economic turmoil, and we're all pretty worried about it. But the main reason why Wen's comments are making news is that foreign leaders generally tend to be a little more circumspect when discussing such matters. The New York Times Wen's called his remarks a display of "unusually blunt concern."
So now the hunt is on to discern the hidden import. What's Wen really trying to say? Is this a shot across the bow, warning against any further attempts to label China a currency "manipulator?" Is it simple chest-beating? China's breakneck pace of growth has slowed and exports have fallen off the proverbial cliff, but the country is still in much better financial position, right now, than most of the industrialized nations in the world, nearly all of which are deep in recession.
Tea leaf readers will have a field day, but the only thing clear to me is how Wen's justifiable nervousness exposes the utter bankruptcy of the theory that China would ever be willing to threaten the United States by employing its so-called "nuclear option" of purposefully liquidating its dollar holdings.
As Wen's comments reveal, China's great fear is that the value of its holdings will decline. There would be no better way to achieve that than by dumping Treasury bonds on the market. In fact, just displaying tentativeness about buying more bonds in the future may be enough to spook markets. For China's own economic security, it needs the U.S. economy to recover. Which means, whether it spawns heebie-jeebies in the Middle Kingdom or not, China has to keep bankrolling Obama's efforts to end the recession.
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