U.S.
Dollar Is `One Step Nearer' to Crisis as Debt Level Climbs,
Yu Says by Shamim Adam and
David Yong | Sep 28, 2010 8:58 AM ET
The U.S. dollar is “one step nearer” to a crisis
as debt levels in the world’s largest economy increase,
said Yu Yongding, a former adviser to China’s central
bank.
Any appreciation of the dollar is “really temporary”
and a devaluation of the currency is inevitable as U.S.
debt rises, Yu said in a speech in Singapore today.
“Such a huge amount of debt is terrible,” Yu
said. “The situation will be worsening day by day.
I think we are one step nearer to a U.S.-dollar crisis.”
Yu also said China is worried about the safety of its foreign-exchange
reserves including those invested in U.S. Treasuries as
the U.S. currency weakens, reiterating his earlier views
on the dollar assets. The U.S. will record a $1.3 trillion
budget deficit for the fiscal year ending Sept. 30, the
Congressional Budget Office said Aug. 19.
The estimated budget deficit for this fiscal year would
be equivalent to 9.1 percent of gross domestic product,
the CBO said. That would make it the second-largest shortfall
in 65 years, exceeded only by the 9.9 percent in 2009.
The CBO also projected the U.S. would have a cumulative
deficit of $6.27 trillion in the next decade, higher than
its March estimate of $5.99 trillion.
Reduced U.S. Holdings
China, the biggest foreign investor in U.S. government
bonds, cut its holdings by about 10 percent to $846.7 billion
in the 12 months ended July, according to the Treasury Department.
U.S. Treasuries fail to provide safety or liquidity in
managing China’s $2.45 trillion foreign-exchange reserves,
Yu said in an e-mail in August. To help cool demand for
the securities, China needs to curb the growth of its foreign
reserves by intervening less in the currency market, he
said.
China should reduce its holdings of U.S.-dollar assets
to diversify risks of “sharp depreciation,”
Yu said in July. The nation should convert some holdings
in U.S. dollars into assets denominated in other currencies,
commodities and direct investments overseas, he wrote in
a commentary in the China Securities Journal.
The increased convertibility of the yuan will ease pressure
on the currency to appreciate, Yu said today at an event
organized by Singapore Management University.
The yuan has strengthened almost 2 percent against the
dollar since June 19, when China’s central bank said
it will pursue a more flexible exchange rate. China maintained
a peg of 6.83 yuan per dollar from July 2008 to June 2010.
Yuan Level
China will independently determine the level of the yuan
and the U.S. doesn’t need to vote on the issue this
week, Vice Commerce Minister Chen Jian said in Taipei yesterday.
The U.S. House of Representatives is due to vote tomorrow
on legislation pressing China to raise the currency’s
value amid assertions the yuan is undervalued and gives
the Asian nation a trade advantage. The legislation would
let companies petition for higher duties on Chinese imports.
“The basic trend is for an appreciation” of
the yuan, Yu said in an interview after his speech today.
“No one can predict the specific pace of the appreciation.
This is difficult to say as it depends on circumstances.
We should not be speculators.”