Reuters (Link) - Zhou Xin, Simon Rabinovitch and Kevin Yao (December 8, 2010)
The U.S. dollar will be a safe investment for the next six to 12 months because global markets are focused on the euro zone’s troubles but America’s fiscal health is worse than Europe’s, an adviser to the Chinese central bank said on Wednesday.
Li Daokui, an academic member of the central bank’s monetary policy committee, said that U.S. bond prices and the dollar would fall when the European economic situation stabilized.
“For now, market attention is still on Europe and for the coming 6-12 months, it will not shift to the United States,” Li said, when asked about U.S. President Barack Obama’s plan to extend tax cuts for all Americans.
“But we should be clear in our minds that the fiscal situation in the United States is much worse than in Europe. In one or two years, when the European debt situation stabilizes, attention of financial markets will definitely shift to the United States. At that time, U.S. Treasury bonds and the dollar will experience considerable declines.”
U.S. Treasury prices fell sharply for a second day on Wednesday as the proposed tax deal sparked concerns over the government’s ability to service its massive debt burden. Moody’s Investors Service said it is worried the tax cuts could become permanent, hurting U.S. finances and credit ratings in the long run.
In Europe, Ireland’s parliament passed the first in a series of resolutions underpinning its 2011 austerity budget on Tuesday, marking the first step in a lengthy approval process. But investors are now worried that the region’s debt crisis could engulf Portugal next, or Spain.
China has a big stake in the performance of dollar assets. The country holds the world’s biggest stock pile of foreign exchange reserves at $2.64 trillion and an estimated two-thirds of that is invested in dollar assets, including U.S. Treasuries.
The State Administration of Foreign Exchange (SAFE), an arm of the central bank, is responsible for managing the reserves.
Li was speaking on the sidelines of a financial forum in Beijing. He sits on the monetary policy committee of the central bank but does not have real influence on key decisions on interest rates and the yuan.
ROBUST CHINA GROWTH
China’s annual economic growth will exceed 9.5 percent in 2011 and will remain above 9 percent through the coming decade, Li told the forum.
The long-term growth outlook would be underpinned by the need to continue investing in infrastructure, he said.
“China has a vast domestic demand that is untapped, and that’s the fundamental difference between China now and Japan in 1985,” Li told a forum.
In addition, China would have to spend a lot on “low carbon” industries, lending more support for the economy, he said.
Li also predicted that global commodities prices, including oil, would rise sharply next year.
Speculation about a Chinese interest rate rise in the coming days has intensified after an official newspaper flagged the chances of an imminent move amid expectations of rising inflation in November.
Asked whether the central bank should raise interest rates, Li said it should take steps to protect depositors.
Concerns about hot money inflows would be a factor when the central bank starts considering whether to raise interest rates, he added. †