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Market turmoil: China calls for action on debt

US dollar and Chinese yuan
Image caption Beijing is reliant on the dollar because it holds about $3tn in foreign reserves

China's premier Wen Jiabao has called on countries to introduce "responsible policies" to address their debt problems and tackle the market turmoil.

He warned that uncertainties were marring a world economic recovery, according to quotes on state radio.

These are his first public comments on the matter since the start of the current market volaility.

But state media has been highly critical of US policymakers accusing them of failing to tackle debt levels.

The Chinese premier's latest comments did not mention any specific economies, referring only to "relevant countries".

'Painful facts'

As the US' biggest creditor, China in particularly concerned about what might happen if the United States ever struggles to pay back its debts.

Chinese leaders have made known their feelings about the downgrading of America's credit rating through a series of articles in key media outlets in recent days.

There are also fears that debt problems could lead to a slowdown of the US economy, which in turn would hit Chinese firms that sell goods there.

But analysts say there is little China can do with its gigantic pile of foreign reserves other than continue buying US debt.

Some articles have not minced their words. "The US government has to come to terms with the painful fact that the good old days when it could borrow its way out of messes of its own making are finally gone," said a commentary piece in Xinhua.

Another piece on Monday, in the People's Daily, the mouthpiece of the Chinese Communist Party, blamed the debt issue on politics.

"Looking into the reality, what's happening in Washington is not an economic crisis, but a political crisis," it said.

These comments are biting, but only repeat some of the concerns expressed more diplomatically by the governor of China's central bank, Zhou Xiaochuan.

Undervalued

"China hopes the US administration and Congress will take responsible policy measures to handle its debt issues," he said a few days ago.

China's attack on the US seems partly motivated by a desire to get back at Washington for all the criticism it has faced over its own currency, the yuan.

For years, China's major trading partners, including the US, have complained the yuan is undervalued, making Chinese goods more competitive.

Image caption Central bank governor Zhou Xiaochuan has encouraged the US to fix its debt issues

But China also believes it has a right to comment on the US debt issue because it has bought so much of it - more than $1tn-worth of government-issued bonds.

Independent Chinese economist Andy Xie said Beijing was worried about the US introducing financial policies that could devalue these holdings.

"China is holding all these papers bought by the sweat of hundreds of millions of workers that could be worthless," he said.

Mr Xie said Beijing had to comment on events in Washington to show its own population - its most important audience - that it was doing all it could to protect its assets.

Currency shift

"People will blame the government if it loses that money," he said.

The Chinese government cannot protect itself by selling its dollar assets - that could bring on the devaluation it so fears.

Analysts believe China will have to continue buying US government bonds, as there is no other credible method of soaking up its foreign reserves, which currently stand at more than $3tn.

Beijing has tried to reduce its reliance on the dollar by moving into other markets and other currencies.

"China will continue to seek diversification in the management of reserve assets," said the central bank governor recently.

Prof Liu Baocheng, of Beijing's University of International Business and Economics, agrees with this approach.

He said the country needed to do more than buy US debt.

"It's a simple, safe but lazy approach. We do it because there is the least likelihood of default and you do not have to manage the money anymore," said Prof Liu.

He said the Chinese government should introduce its own financial reforms to ease its problems.

The government's reserves are so large partly because it buys up foreign currency held by Chinese companies.

Prof Liu said allowing firms to keep their dollars and invest them abroad would be just one way of reducing the government's massive foreign currency holdings.

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