(SBU) EAST CHINA ANXIOUS OVER CHINA'S DOLLAR HOLDINGS

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E.O. 12958: N/A
TAGS: CH ECON EFIN KPAO PGOV PREL SOCI
SUBJECT: (SBU) EAST CHINA ANXIOUS OVER CHINA'S DOLLAR HOLDINGS


1. (SBU) Summary. East China reporters and academics
interacting with visiting Dallas Federal Reserve Bank President
Richard W. Fisher repeatedly raised the possibility of a link
between current U.S. monetary and fiscal policy expansion and
future U.S. inflation. One of the most vocal academic critics
implied that China is right to move away from U.S.
dollar-denominated assets, since these are likely to decline in
value. The interlocutors were concerned whether the U.S.
economy has hit bottom. They also sought the visitors'
perspective on China's first steps toward taking a more active
role in the international financial system. End summary.


2. (SBU) President Fisher, Vice President Mark A. Wynne, and
Senior Research Economist Tao Wu, all from the Dallas Fed, held
a press conference and then joined academics in a small
roundtable discussion during their visit to Shanghai on April

19. Fifteen media outlets were represented, including 21st
Century Business Herald , China Daily, Bloomberg, Dow Jones,
China Market News, Shanghai Daily, International Finance News,
Oriental Morning Post, Shanghai TV's Business Channel, China
Business News, Shanghai Business News, Shanghai Morning Post,
Shanghai Financial News, the Economic Observer, and Bund
Pictorial. Academics participating in the roundtable included
Pan Yingli, Jiaotong University; Sun Lijian, Fudan University;
Chang Chun, China Europe International Business School (CEIBS);
Tian Boping, Jiangsu Academy of Social Sciences; Chen Baomin,
Nanjing University; and Wang Zhikai, Zhejiang University.

============================
Fears That U.S. Inflation Will Diminish the Dollar's Value
============================


3. (SBU) Reporters and academics interacting with President
Fisher in Shanghai repeatedly raised the possibility of a link
between current U.S. monetary and fiscal policy expansion and
future U.S. inflation. During the media roundtable, questions
ranged from the Oriental Morning Post's "Will there be a dollar
crisis?" to more specific ones, such as the 21st Century
Business Herald's "Will the Fed's purchase of US$300 billion in
U.S. Treasuries decrease the value of the dollar?" and Dow
Jones' "Given that the United States does not want IMF
oversight, what can the U.S. government do to reassure China
over its concerns about the dollar?"


4. (SBU) The academics revealed a strongly held presumption
that there is a direct relationship between today's U.S. market
stabilization measures and future inflation. Zhejiang
University's Wang asserted that U.S. inflation will eventually
reduce the value of China's dollar-denominated assets.
Jiaotong's Pan was the most vocal critic. At one point,
President Fisher prefaced his response to another academic--who
asked whether the U.S. would guarantee returns on U.S.
Treasuries--with the statement that the value of Treasuries is
set by markets, so no one could provide a guarantee. President
Fisher went on to explain that the Fed governors were viscerally
opposed to allowing an inflation spiral that would erode the
value of Treasuries, but Pan seemed to hear only the first
remark. She snorted and said aloud, "I knew that there could be
no guarantee." Pan later chuckled when President Fisher
mentioned that China had slowed its purchases of Treasuries in
the first two months, implying that China is right to reject an
asset that would decline in value. (Note: Pan is reputed by
our contacts to have had significant input into People's Bank of
China Governor Zhou Xiaochuan's recent proposal to find a
substitute for the U.S. dollar in the international monetary
system. End note.)


5. (SBU) Pan questioned President Fisher further on future Fed
management of the money supply. We expect that inflation will
rise, she said, so what plans does the Fed have to soak up the
excess liquidity? Pan commented that it is sometimes difficult

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to see inflation coming in the globalized economy, since
inflation can be imported from trading partners. She posited
the following scenario: Several countries with reserve
currencies expand their money supplies and boost their imports.
As a result of the higher demand, an inflation cycle starts in
the exporting countries. Since this inflation does not show up
in the domestic indicators of the importing countries, the money
supplies there are not reined in. Eventually, the inflation
does show up domestically, but by then it is too late to stop.

============================
"Have We Seen the Bottom?"
============================


6. (SBU) The reporters and academics were also focused on when
the U.S. economy would begin to recover. Jiaotong's Pan simply
asked, "Has the United States hit bottom? How much farther will
the U.S. housing market fall?" CEIBS's Chang asked about the
U.S. Treasury's plans to dispose of "toxic" assets, while noting
that even without details of the Public Private Investment
Program, the stock market was already rising. Was this a false
dawn? Chang wondered.

============================
Seeking Perspective on China's Role
============================


7. (SBU) Another common thread in the reporter's questions was
to seek the U.S. perspective on China's more visible role in the
international financial system. Two reporters asked for
President Fisher's view on internationalization of the renminbi.
Did President Fisher approve of the Chinese Government's
recently announced move to allow the renminbi to be used for
settlement of some trade contracts? Would this have an impact
on the U.S. dollar? queried a China Business News reporter,
echoed later by a China Daily reporter. The China Daily
reporter also asked for President Fisher's views on China's
domestic economy: "Why is China able to have such a high
economic growth rate?"

============================
Comment
============================


8. (SBU) Those meeting with President Fisher appeared to
appreciate the clear anti-inflation, strong dollar message that
he delivered. However, not all appeared to be
convinced--Jiaotong's Pan, for instance, continued her
criticisms of U.S. monetary policy in talks with other academics
as the group departed. Both the reporters and the academics
sometimes appeared to underestimate the independence of the Fed
in setting monetary policy. The questions also demonstrated
what President Fisher called the "burden" of being the world's
largest economy: in the same forum, one person might imply that
the United States should grow faster, while another would
express concerns about possible inflation. In a more nuanced
mode, both Pan and CEIBS's Chang asserted that former Treasury
Secretary Paulson and then New York Fed President Geithner
standing together as financial stabilization measures were
announced created the image that the Fed was doing the bidding
of political authorities.


9. (SBU) It may be that Chinese misperceptions of the Fed's
role have been fed by the 2007 book "Currency Wars" (Huobi
Zhanzheng),a popular work still prominently displayed on many
local bookstore shelves that borrows liberally from conspiracy
theories that the Fed does the bidding of its member banks, and
is not to be trusted as an independent monetary authority.




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10. (U) The Dallas Fed delegation has cleared on this cable.
CAMP