China's Premier comments on U.S. debt

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China's Premier Warns Growth Target Will Be Tough

Wen said China had worked to diversify its foreign exchange reserves, the world's largest at nearly $2 trillion, and that they were "safe overall".

But he also sent a stark message to the United States, with most of Chinese FX reserves held in dollar-denominated assets and China the biggest holder of U.S. government debt. He noted that China is the biggest foreign creditor to the United States and appealed to Washington to make sure its response to the financial crisis does not damage the value of Beijing's holdings.

"Of course we are concerned about the security of our assets and, to speak truthfully, I do have some worries," Wen said. "I would like, through you, to once again request America to maintain their trustworthiness, keep their promise and guarantee the safety of Chinese assets."

These are interesting comments from the Chinese Premier, and I question the propriety of their timing. It mostly seems like posturing to me, although I don't understand what he is seeking to accomplish by them.

The fact of the matter is that, despite the recent decline in export demand and some shift toward internal economic growth - China's GDP is still largely externally driven. So long as that is the case, and so long as they desire to be a nation of savers, as opposed to spenders, they don't have much choice in regard to buying our debt. To a large extent, our economies are inherently entangled, and neither of us can move too fast to untangle them without fundamentally damaging the mechanisms that our own economies are built on. In a way, we have a mutually parasitic relationship.

All that having been said though, some day the Chinese will decide that it is time for them to start enjoying the fruits of their labors - today instead or tomorrow - and that sea change may well create some challenges for America, and a need to significantly adjust our economic models.