China urges action on EU and US debt

MANADO (Indonesia): China is worried about challenges that the European Union faces in the next two months and urged the bloc as well as the United States to hold down government debt, its trade minister said yesterday.

Speaking at a meeting of South-East Asian trade ministers, Chen Deming called on governments in the United States and Europe, China's top two trading partners, to act responsibly and get their fiscal houses in order.

“We support stabilising measures taken by relevant countries, but we hope these countries will take measures to control their government debt proportion and take bigger responsibilities,” Chen said.

“We are also concerned about new challenges facing European countries in August and September,” he said, but did not elaborate.

His remarks echo recent comments from Beijing, which has invested nearly all of its US$3.2 trillion foreign exchange reserves, the world's largest, in dollars and euros and would loathe to see the currencies plummet on economic problems.

World financial markets have swung wildly in the past week on fears that Europe cannot contain its debt crisis and after a downgrade of the US sovereign credit rating, which amplified concerns that the US econony may slide back into another recession or a prolonged period of meagre growth.

US deputy trade representative Demetrios Marantis, attending the meeting, said the United States was now on a path towards fiscal discipline, following a deal this month to lift its debt ceiling.

He brushed off concerns by trade ministers at the meeting worried about weaker US demand for Asian goods.

“The US is the biggest market in the world and will continue to be a driver of global growth,” he told Reuters.

The US Federal Reserve has vowed to maintain interest rates near zero until 2013 to prop up its economy, and Chen said Asian governments should work together to monitor the impact, after funds seeking higher yields have driven up Asian stocks and currencies in the past year.

Chen noted the world was still struggling with the excess cash left behind by the loosening of monetary and fiscal policies during the 2008 financial crisis, which was “like taking medicines that will have a side effect.”

“Where would the excessive liquidity flow to? Commodities, stock markets or bond markets? We are not quite sure yet,” Chen said.

On the yuan, a controversial issue among China and its trade partners, Chen reiterated Beijing's usual refrain that the currency should only rise gradually and said it would stick to restructuring reforms of the domestic economy.

“We will also stick to gradual and steady currency reform,” he said, adding that yuan volatility would be greater when global markets were jumpy.

“But looking from a longer-term perspective, the yuan currency policy will not change.”

Chen's remarks come amid market talk that China may be about to shift its policy stance on the yuan soon after guiding the currency to a series of record highs.

A flurry of Chinese media reports that predicted speedier gains in the yuan have also fuelled speculation.

China keeps the yuan on a tight leash as it worries any sharp gains could hurt its exports and weigh on the world's second-biggest economy. Reuters