Cables show China used debt holdings to press US

WASHINGTON (AFP) – Leaked diplomatic cables vividly show China’s willingness to translate its massive holdings of US debt into political influence on issues ranging from Taiwan’s sovereignty to Washington’s financial policy.

China’s clout — gleaned from its nearly $900 billion stack of US debt — has been widely commented on in the United States, but sensitive cables show just how much influence Beijing has and how keen Washington is to address its rival’s concerns.

An October 2008 cable, released by WikiLeaks, showed a senior Chinese official linking questions about much-needed Chinese investment to sensitive military sales to Taiwan.

Amid the panic of Lehman Brothers’ collapse and the ensuing liquidity crunch, Liu Jiahua, an official who then helped manage China’s foreign reserves, was “non-committal on the possible resumption of lending.”

Instead, “Liu — citing an Internet discussion forum — said that as in the United States, the Chinese leadership must pay close attention to public opinion in forming policies,” according to the memo.

“In that regard, the recent announcement that the United States intends to sell another arms package to Taiwan increases the difficulty the Chinese government faces in explaining any supporting policies to the Chinese public.”

His comments came days after the Pentagon notified Congress it was poised to sell $6.5 billion worth of arms to China’s arch rival Taiwan.

The much-delayed package was eventually sold, but did not include requested F-16 jets.

Taiwan and the mainland have been governed separately since they split in 1949 at the end of a civil war, but Beijing sees the island as part of its territory awaiting reunification, by force if necessary.

In the same meeting, Liu — wary about Chinese losses — also pressed US officials for a government guarantee that any investments in US financial institutions would be back-stopped.

Chinese Premier Wen Jiabao
© AFP/File Chai Hin Goh

“Liu remained non-committal on the possible resumption of lending, but agreed that (China’s State Administration of Foreign Exchange) had sufficient confidence in those institutions and would consider a system whereby the Federal Reserve or other US government agency would act as a guarantor,” according to the cable.

Trying to allay his concerns, Liu’s US interlocutors pointed to the government’s ability to “guarantee bank liabilities to support the banking system and address the systemic financial risk that could be caused by a potential bank failure.”

Another cable, dating from March 2009, showed US sensitivities about possible changes in the composition or level of those holdings, which could have major repercussions for US finance.

China is the largest holder of US debt, underpinning US government spending. Its holdings of US Treasuries have more than doubled since 2007.

A week after Premier Wen Jiabao stated publicly that he was “‘concerned” regarding the security of its US Treasury holdings,” the US embassy in Beijing sent a cable to Washington hoping to answer the question: “What Did Wen Mean?”

“Wen’s remarks immediately generated intense speculation that China might be contemplating some adjustment in its foreign reserve management policy,” the note said, reporting that a senior Treasury official had also sought clarification.

The writer pointed to China’s concern about US inflation — which could reduce the value of Chinese dollar holdings — stemming from the Federal Reserves’ ultra-easy monetary policies.