'No worry' about US debt impasse

Updated: 2011-07-25 16:33


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BEIJING - China does not need to worry about stalled US talks over the debt limit, an academic adviser to the People's Bank of China said on Monday, predicting that American politicians will ultimately reach a deal to avert a crisis.

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Xia Bin, a member of the central bank's monetary policy committee, played down near-term risks to China's economy since Washington has little choice but to continue pursuing loose monetary policy in a bid to spur the world's biggest economy.

"Don't worry too much about it. The United States will have to issue more debt and issue more currency," Xia told reporters.

Xia said the debt talks have gained too much media attention as US politicians try to maneuver on the debt issue to score strategic points before the next presidential election in November 2012.

"They won't betray the national interest. They are now playing with politics," Xia said.

"They will definitely reach a compromise," he said.

As a central bank adviser, Xia is an influential economist but is not directly involved in policymaking.

Prospects of a budget breakthrough faded as lawmakers missed a self-imposed deadline to produce a deal by the time Asian markets opened for the new week. They still plan to outline proposals on Monday, but both sides appear further apart than ever.

Moody's, Standard & Poor's and Fitch have said they will downgrade the US credit rating if failure to raise the nation's $14.3 trillion debt ceiling leaves the Treasury without cash to service its debt obligations in August.

Investors in Asia took a defensive stance, although there was no evidence of the sort of panic selling that some politicians in Washington had feared. Stocks slipped while the Swiss franc rose and gold hit a record high.

Gradual diversification

Xia reiterated his earlier views that China should speed up diversification of its rapidly accumulating foreign exchange reserves away from dollar assets to hedge against risks from what he predicted would be a long-term decline for the US currency.

China's reserves, the world's largest, swelled by $152.8 billion in the second quarter to a record $3.2 trillion, driven by sustained capital inflows and trade surplus.

Chinese officials have pledged to diversify the huge reserves -- as much as 70 percent of which are believed to be in US dollar assets -- but the process has been gradual.

China faces "pressures and challenges" in managing its huge foreign reserves, but the holdings may also present the country with an "unprecedented" opportunity to help its long-term growth, Xia told Reuters on July 14.

Separately, Zhu Baoliang, chief economist at the State Information Centre, a top government think-tank, said he also expected the US debt impasse to be temporary.

"I think they will reach a compromise. The possibility of a debt default in the United States is not big," he told Reuters.

Zhu said the US debt market -- the deepest and most liquid in the world, remains the main investment destination for China's foreign currency reserves, despite steady diversification towards European and other non-dollar assets.

"The direction of our reserve investment will not change too quickly, we can diversify our reserves slowly but it's hard to make any big adjustment in the short-term," he said.

Zhu said China's economy is on a sound footing despite risks from the United States and Europe, keeping the door open for further policy tightening to tackle stubbornly high inflation, which hit a three-year high of 6.4 percent in June.

"Chinese leaders have made clear that fighting inflation remains their top priority, so we cannot rule out rises in interest rates and banks' reserve requirement ratios," he said.

The central bank raised interest rates five times and lifted banks' reserve requirement ratio nine times since October to try to wrestle inflation under control.


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