China worried about U.S. debt investments

March 13, 2009 7:08:41 PM PDT
The global economic downturn is causing ripples across the Pacific as well. China's top leader raised concerns about its massive holdings in U.S. treasury bonds.

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China's premier, Wen Jiabao, appears upbeat as he walks into a rare Beijing news conference. But his message was sobering.

The Chinese leader is worried about the $1 trillion his country holds in U.S. treasury bonds. Those bonds finance U.S. debt, including the massive stimulus program just getting started.

China's economy has slowed down, too -- the result of fewer exports to the U.S. as American consumers cut back spending. That has led to massive layoffs at Chinese factories.

Condoleezza Rice, the former secretary of state, now back at Stanford, says the global recession could lead to unrest in china.

"There's now a reverse emigration going on in China with people leaving the cities and trying to get back to the villages. One wonders about the political implications, the political stability of that kind of shift," said Rice, Ph.D.

China's leaders once told Rice that they need to generate 25 million new jobs a year to expand its economy.

Its growth is tied to America's economic growth. But China's U.S. investments will sour if the dollar weakens as a result of massive spending financed by bond debt.

"The financial crisis worldwide is largely made in the U.S., and the Chinese financial system is in good shape," said Stanford international trade economist Prof. Ronald McKinnon, Ph.D.

China is preparing to spend just over a half trillion dollars to stimulate its economy.

Treasury Secretary Tim Geithner has been getting a cool reception among European Union countries about doing the same thing.

"The European response is not so simply that it's your problem, but that we don't necessarily want to use the same medicine that you do. So I would agree with some of their responses as hey, we've got a different problem. Maybe it's not as big, maybe it's different," said Stanford economist Prof. John Taylor, Ph.D.

Professor Rice says the global recession is becoming a complex political issue.

This whole issue has implications not just for developed countries, but also for developing countries as they seek out economic models that work in the 21st century.

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