China flays the US

Beijing - Chinese editorials flaying Washington for fiscal recklessness over its debt dramatics and downgrade mask a growing unease in Beijing: a fear that China's own economic policies are shifting too slowly.

Interviews with a dozen high-ranking Chinese officials and government economists showed frustration with China's self-imposed fetters to the US dollar and louder calls for a change, but no clear short-term plan to break free.

The obvious answer - allowing the yuan to rise more rapidly - carries economic and political costs that China is probably not yet prepared to pay.

One idea that appeared to be gaining some traction in Beijing is to loosen restrictions on Chinese businesses and citizens investing abroad. That would help to reduce the build-up of cash inside China.

But it would only marginally trim China's US exposure.

An estimated two-thirds of China's $3.2 trillion in reserves is invested in US dollar-denominated assets such as Treasuries, and the pile of cash grows each month thanks to a heavy trade surplus.

Standard & Poor's stripped the United States of its prized AAA rating on Friday, citing the government's rising debt burden, which drew a blast of criticism from official China media.

Some officials who spoke to Reuters sounded resigned to their fate, acknowledging that there is no viable alternative to investing in US Treasury debt.

But others saw the US debt debacle in recent weeks as just the sort of shove Beijing needs to speed up domestic reforms.

"We need to diversify to the greatest extent possible," said one People's Bank of China official, who spoke on condition of anonymity because he was not authorised to speak to the media.

"China's position has always been very clear," he said.

"First, we'll demand strongly that the United States strengthen its self-discipline - they can't just keep issuing debt without limit. Secondly, we need to speed up the pace of our domestic economic transformation and reduce our accumulation of foreign exchange reserves."

Public shame

China's public response to the US debt troubles, expressed in a series of scathing commentaries in the state-controlled media, has been to censure Washington for neglecting its responsibility as issuer of the world's primary reserve currency and trying to "borrow its way out of messes of its own making".

But in interviews with Reuters, some officials quietly acknowledged Beijing's own policies have put China in an uncomfortable position, and argued they would have to change.

China has already laid out a five-year plan that envisages promoting domestic consumption, something the United States has urged for years as a way to reduce a gaping trade imbalance and shrink the vast heap of dollars Beijing invests in Treasuries.

But 2015 is a long way off.

One idea for quicker change came up in conversations with several sources: easing restrictions on foreign investment.

"The government will quicken its pace to allow Chinese companies and individuals (to) invest abroad," said a government economist with the National Development and Reform Commission, China's economic planning agency.

Cheng Siwei, a former vice-chairperson of China's parliament, made the same point in a Reuters Insider interview on Monday.

As for China’s existing US debt holdings, Cheng recommended a policy of "no buy, no sell," keeping what's already there but not acquiring any more.

The catch, of course, is that China needs to do something with the money that keeps flowing in. Figures due on Tuesday are expected to show the trade gap swelled to $27.5bn in July, up from $22.3bn in June.

Some economists offered other, more offbeat ideas for weaning China off US government debt, although the suggestions were unlikely to be implemented.

China should negotiate with the United States to convert part of its Treasury holdings into equity stakes in US financial or energy firms, said Jing Xuecheng, a former deputy head of research for China's central bank who now runs his own research institute.

Yu Yongding, a former central bank adviser, made a stir on Friday by calling for China to let the yuan float as soon as possible to halt a further build-up in reserves. His comments, published in the Financial Times, were more forceful than those expressed by other officials in interviews with Reuters.

By choice, not by force

China's ruling Communist Party has long been reluctant to take any steps that might jeopardise the fast economic growth that has helped it stay in power, and generally sees a quick revaluation of the yuan as too risky.

Still, the fact that a well-known former Chinese official is publicly calling for such a sharp policy shift shows that Beijing is ripe for change, whether quicker liberalisation of the yuan or a more decisive shift away from exports and towards domestic consumption.

The United States and the International Monetary Fund have cajoled China for years to loosen its grip on the currency, but pressure from within its own borders matters more.

China's state-owned investments are a source of national pride - particularly when many advanced economies are buried in debt - and its choices of where to put the money can be contentious, especially when they lose money.

Chinese Vice-Premier Wang Qishan, who is in charge of finance, has drawn criticism from peers and political rivals for big paper losses from China's investments in the United States, including the sovereign wealth fund's ill-fated invested in Blackstone Group, according to two sources with leadership ties.

"The downgrade in the US credit rating gives China's government an extremely rare opportunity to reconsider their development strategies," said Zhang Ming, an economist from state think tank the Research Centre for International Finance.

Zhang said China could deal with the short-term impact of the US downgrade by buying more US stocks and corporate bonds instead of Treasuries, and hold more yen, euros and emerging market currencies instead of dollars.

Longer term, he wants to see some redistribution of domestic income and a more flexible yuan.

"It bears asking, is it not time to end this model that prioritises growth above all else, to the point of sacrificing domestic resources and people's well-being?"