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China urges US to deal with debt issue

Shanghai, August 3, 2011

China's central bank governor urged Washington on Wednesday to act responsibly to deal with its debt issues, saying uncertainty in the US Treasuries market will undermine the international monetary system and hamper global growth.

The remarks by Zhou Xiaochuan, head of the People's Bank of China, were China's first official response to the passage of a US deficit-cutting deal after weeks of bitter wrangling that alarmed financial markets and brought the country to the brink of what some pundits predicted would be a catastrophic debt default.

As the largest creditor to the United States, China is particularly vulnerable to US debt strains. Beijing has repeatedly urged Washington to protect its dollar investments, estimated to account for about two-thirds of its $3.2 trillion in foreign exchange reserves, the world's largest.

Zhou welcomed US progress in dealing with its debt problems but urged Washington to take what he called "concrete and responsible" measures to bolster confidence in US
Treasuries, of which China is a major buyer.     

"Big fluctuations and uncertainty in the US Treasury market will influence the stability of international monetary and financial systems, thus hurting the global economic recovery," Zhou said in a statement posted on the central bank's website.

"We hope that the US government and the Congress will take concrete and responsible policy measures ... to properly deal with its debt issues, so as to ensure smooth operation of the Treasury market and investor safety."     

Due to the vast size and deep liquidity of the Treasury market, US government bond yields are often the benchmark for the pricing of other financial assets around the world.

So a sharp spike in US yields may roil markets and raise borrowing costs, endangering global economic activity. Investors who hold Treasuries as collateral would be hurt, too.

Zhou made the remarks after US President Barack Obama on Tuesday signed into law a measure to cut spending and raise the US debt ceiling, averting a default on government financial obligations.      

"We welcome such progress," Zhou said. "We will further study details of the measures and closely monitor how they would be implemented in various stages." - Reuters




Tags: China | US | treasury | debt default |

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