China would use its creditor status as bargaining chip with US
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Last Updated: Sunday, May 23, 2010, 22:59
Beijing: On the eve of a crucial Sino-US strategic dialogue, Beijing has indicated that it would use its position as the largest holder of US debt to drive a hard bargain to resist American pressure on currency appreciation and other issues of strategic interests.

The US Strategic and Economic dialogue will commence here tomorrow and would be attended by US Secretary of Hillary Clinton and Treasury Secretary Timothy Geithner, among others.

"As the largest holder of Washington's debt, China should strive to drive a hard bargain with the US, especially in the context of the latter's insistence on the appreciation of the Yuan," said a hard-hitting commentary in the ruling Communist Party mouthpiece, People's Daily.

China's US treasury debt holdings rose to a whopping USD 895.2 billion by the end of March, making it Washington's No 1 creditor.

"But China has faced a dilemma due to this status, which has imposed asymmetrical rights and obligations with regard to Washington," it said.

Clinton, along with Geithner has arrived in Beijing to take part in the two-day dialogue, during which analysts say the two sides would not be sparing any punches.

The dialogue, the second since last year, covers a whole range of issues including tension in the region over North Korea's role in the sinking of a South Korean ship and concerns over nuclear non proliferation.

Ahead of the dialogue US media has reported that the two countries has already reached a quid-pro-quo understanding over China's plans to build two more nuclear power reactors for Pakistan in return to Beijing's backing to US move for UN sanctions against Iran over its nuclear programme.

The two sides would also be reviewing each other's perceptions on the situation in South Asia, which included India and Pakistan.

India would be closely watching the outcome as the overarching dialogue is taking place significantly ahead of India-US strategic and economic dialogue due to be held in Washington in early June.

While Clinton would hold the strategic dialogue with Chinese State Councillor Dai Bingguo, Geithner would hold talks on a range of economic issues with Chinese Vice Premier Wang Qishan.

The outcome of the talks was expected to set the tone of their relations for the rest of the year.

US Commerce Secretary Garry Locke has already said that Washington looks to overhaul its export control policies this year to pave the way for the sale of more high-technology goods to China and India, especially in area of green technology, to boost the stagnant exports.

The People's Daily in its comments said China should bargain hard using its creditor status.

Since China's huge foreign investment is in the form of reserve assets or government lending, it may be labelled an "official creditor", as opposed to a "private creditor", which is based on a country's foreign direct and private investments.

By the end of last year, China's foreign reserves had touched USD 2.3992 trillion, or 69.3 per cent of the USD 3.4601 trillion that the country held in foreign financial assets, it reminded Washington.

"As a fledging creditor nation, China has chosen to convert its enormous trade surplus into official foreign reserves, which have partly found its way into the US capital markets due to Beijing's large-scale purchases of US government bonds," it said.

"China is expected to get a return ratio of only 3 to 4 per cent by investing in the national debt of the US.

"On the other hand, the US, despite its huge debt and yawning trade deficit, accepts more dollar inflow, and then invests these commodity dollars, chiefly into Asian emerging markets".

"As a result, Washington gets a return ratio of 10-15 per cent compared to China's much lower investment return ratio," it said.


First Published: Sunday, May 23, 2010, 22:59

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