Time for China to dump US debt?

Updated: 2011-10-20 09:56


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Ways to pull out

Economists agree that as the United States' largest foreign creditor, China should contemplate ways to pull itself out of the "dollar trap," as the US economy is faltering with its debt piling up and its currency on the brink to depreciate.

China must make fuller use of the non-financial assets in its foreign reserves, as well as speed up the diversification of investing channels to resist a possible long-term weakening of the dollar, said Xia Bing, director of the Finance Research Institutes of the Development Research Center under the State Council.

Zheng Xinli, permanent vice chairman of China Center for International Economic Exchanges, has suggested that Chinese companies boost overseas investment as a way to absorb trade surpluses and fend off the dollar risk.

The dependency on the US Treasuries partly revealed the country's incapability to invest overseas, Zheng said. "Why did Germany and Japan not buy such a large amount of foreign bonds when they were running huge trade surpluses? That was because of their strong capability to invest overseas, which helped digest the excessive trade surpluses," Zheng said.

But the fundamental way out may lie in adjusting the country's macro-economic policies.

"China has tried various measures to slow down the growth of the foreign reserves and protect the value of its existing stock. Sadly, none has worked. With large capital inflows and a current account surplus, China's foreign exchange reserves have continued to rise rapidly," Yu said in his article.

The country must adjust or even annul those macro-economic policies that result in further accumulation of foreign exchange reserves. Only by doing this can China free itself from the "dollar trap," Yu said.

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