Beijing Attaches Strings to buying more US treasuries

Although the beleaguered Bush administration is looking to the Chinese government to soak up a good proportion of the treasury bonds it is issuing to finance the US$700 billion-plus bailout for America’s troubled financial institutions, the Chinese Communist Party Central Committee so far has had little to say and appears ready to exact its pound of flesh after a series of recent military and other snubs by the US.

To the disappointment of the US’s increasingly desperate politicians, the central committee Sunday ended its plenary session remaining mum about the exact role that Beijing would play in joining in efforts by the US and the Western world to combat the worst financial crisis since the 1929 Depression.

In the past week, US Treasury Department officials have expressed hope that China – which sits on US$1.8 trillion worth of foreign exchange reserves – will take proactive steps to help fight the looming global meltdown.

Given the so-called constructive, cooperative partnership between China and the US, it is likely that Beijing, which already holds some US$600 billion worth of treasuries, will continue to function as a “responsible stakeholder” in the global community. Earlier this month, Premier Wen Jiabao indicated that Beijing would “join hands” with other nations in fighting the financial tsunami.

And People’s Bank of China (PBOC) Vice-Governor Yi Gang, who took part in the emergency G20 meeting in Washington over the weekend, told the media that “China was willing to strengthen coordination with other nations, and hoped all countries could make concerted efforts to protect the stability of the international financial market.”

It is also clear, however, that the Hu Jintao leadership will be attaching conditions to what the Chinese media call the “save the US” operation. Last week, the People’s Bank of China, China’s central bank, denied a report in the Hong Kong media that it would be purchasing US$200 billion more American government bonds.

More significantly, the Chinese media, which is tightly controlled by party censors, has been replete with articles and commentaries urging Beijing authorities not to throw in good money after bad. On the issue of buying more US bonds, Chen Baosen, a senior researcher at the Chinese Academy of Social Sciences, noted that “under the principle of international cooperation, China should adopt a sympathetic and supportive stance” toward the US plight.

However, Chen also pointed out that “China should not deviate from its own national interest through paying the bill [for the US].” Jin Bitou, a popular commentator, was more explicit. He wrote on the People’s Daily website that it would be “suicidal” to put China’s forex exchange holdings in just the US dollar basket. Another analyst writing in the China News Service blogsite suggested that Beijing must secure “solid collaterals such as Boeing aircraft” before acquiring more American IOUs.

Given China’s dependence on the American export market – and the growing symbiotic nature of the two economies – it is probable that Beijing would at least buy some of the new US bonds on offer. The size of the purchase, however, could depend on whether the two capitals can resolve several hiccups that have cropped up recently. Beijing has fumed over Washington’s approval of the sale of US$6.5 billion worth of guided missiles and other hardware to Taiwan, saying that this would “gravely jeopardize China’s national security.” The Chinese media has also run several commentaries on the “anti-Chinese” implications of recent stationing of the US nuclear aircraft carrier, the USS George Washington, in the Japanese naval port of Yokosuka.

More importantly, finance officials under Premier Wen have indicated displeasure over obstacles that the China Investment Corp (CIC) (the Chinese sovereign fund vehicle) and other state-controlled companies are facing in acquiring American assets. For example, CIC’s late September plan to snatch up a big chunk of Morgan Stanley failed to materialize. Over the longer term, Beijing wants Washington to lower allegedly protectionist measures against Chinese exports – and to give the Chinese government a bigger say in international financial institutions such as the World Bank. The Hu-Wen leadership seems confident that given the steady erosion of America’s “sole superpower” status, the rising “quasi-superpower” that is China will be better positioned to exert bigger influence in shaping the fast-changing global economic order.