Tags: China | US | Debt | Impasse

Morgan Stanley's Roach: China ‘Appalled’ by US Debt Impasse, May Curb Treasury Buying

Thursday, 28 Jul 2011 10:03 AM

 

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Senior Chinese officials are “appalled” by the impasse among U.S. politicians on raising the nation’s debt ceiling to avoid a default, said Stephen Roach, non-executive chairman of Morgan Stanley Asia Ltd.

“Coming so shortly on the heels of the subprime crisis, the debate over the debt ceiling and the budget deficit is the last straw” for China, New York-based Roach, 65, said in an e- mailed note today. He said his assessment was based on visits to Beijing, Shanghai, Chongqing and Hong Kong.

In another sign of concern within the nation that is the biggest foreign owner of Treasuries, the official China Securities Journal said today that the U.S. stand-off signals long-term dollar weakness that will push up commodity prices and pose inflation risks for the world. In Mumbai yesterday, a former central bank adviser, Yu Yongding, repeated his call for China to reduce its Treasury holdings, adding that a default would be “disastrous.”

Roach cited an unnamed Chinese policy maker as saying in mid-July that “we understand politics, but your government’s continued recklessness is astonishing.” In the past, the economist has met with officials including central bank Governor Zhou Xiaochuan.

Lawmakers’ Vote

In the U.S., the Standard & Poor’s 500 Index fell 2 percent yesterday, the biggest drop in almost two months, as a potential default on Aug. 2 drew closer. Stock index futures rose today, indicating that the gauge will rebound before lawmakers vote on a Republican proposal to raise the debt ceiling.

House Speaker John Boehner of Ohio gained support among fellow Republicans after reworking the legislation to cut $917 billion over 10 years, more than he originally planned. All 51 Senate Democrats and two independents signed a letter yesterday pledging to oppose the measure.

China’s currency regulator, which manages the country’s $3.2 trillion of foreign-exchange reserves, called this month for the U.S. to protect the interests of investors in American debt. Comments in China have also included expressions of confidence that U.S. lawmakers will reach an agreement. Xia Bin, a central bank adviser, said July 25 that the stakes were too high for them to do otherwise.

“Senior Chinese officials are appalled at how the United States allows politics to trump financial stability,” Roach said. China’s appetite for Treasuries will wane as stronger domestic consumption cuts its current-account surplus and reduces the build-up of foreign-exchange reserves, he added.

China, the owner of $1.16 trillion of Treasuries, is losing confidence in America’s government “and its dysfunctional economic stewardship,” the economist said. Declining demand from the nation will raise the question of how the U.S. economy can fund itself without suffering a “sharp” decline in the dollar, a “major” increase in real long-term interest rates, or both, he said.

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