China tells U.S. to put fiscal house in order

(Reuters) - Sovereign debt troubles in Europe underscore how important it is for the United States to control its own borrowing as its indebtedness reaches concerning levels, a senior Chinese official said on Thursday.

With China facing criticism for holding its currency in a de facto dollar peg, assistant finance minister Zhu Guangyao shifted attention to Beijing's own worries about U.S. policies, especially its soaring deficit, ahead of high-level bilateral meetings next week.

There will be "quiet discussions" about the yuan at the Strategic and Economic Dialogue, but external pressure will only delay the exchange rate reform that China wants to implement, he told a news conference.

The global economy's more urgent need is for financial conditions to stabilize in Europe in the wake of Greece's debt woes, Zhu said.

"The European sovereign debt crisis is a challenge not just for the countries that are party to it, such as Greece. In fact, it is a challenge to the stability of the entire international financial market," he said.
"It concerns the recovery of the entire international economy, and so it demands a common response from the international community," he said.

China will look to coordinate its economic policies with the United States as a buffer against the turbulence and would also like the G20 group of nations to play a role in strengthening the global response, Zhu said.
But the United States needs to take a hard look at its own fiscal situation in the light of what has happened in Europe, he said.

"We hope that the U.S. deficit will fall as a proportion of GDP as the economy recovers and reach a sustainable level," Zhu said.

This is a matter of concern for China and it has noted that U.S. officials, including President Barack Obama, have promised to keep an eye on debt levels, he said.

China is the world's largest holder of U.S. Treasuries with $895.2 billion. It added to its stockpile in March for the first time in seven months.


Chinese officials, including Premier Wen Jiabao, last year prodded the Obama administration to avoid pursuing fiscal policies that could erode the value of those treasury holdings.

YUAN ON BACKBURNER

Zhu said that currency policy would come up at the U.S.-China dialogue next Monday and Tuesday, but that such sensitive issues would be best handled only in "quiet discussions."

Just one month ago, it looked as if the big issue at the meetings would be Beijing's practice of locking the yuan to the dollar since mid-2008, an attempt to cushion the Chinese economy from the ravages of the global financial crisis.

Many analysts and investors had thought that the U.S.-China dialogue or a G20 summit in June were unofficial deadlines for Beijing to resume yuan appreciation, lest it face punitive measures for Washington.

But the debt troubles in Europe coupled with signs of a stronger U.S. recovery have softened criticism of China's policy and pushed back forecasts for any de-pegging.

The United States will continue nudging China to let its currency appreciate, but trade issues appeared to be higher on the U.S. agenda for the bilateral meetings.

That is the way it should be, Zhu said.
"Specific measures of yuan reform will be decided by China itself, according to economic developments in both China and the world," he said.

"What I want to particularly emphasize is that China will not push forward yuan reform under the external pressure," he added. "External pressure and noise can do nothing but slow down the reform process."

(Writing by Simon Rabinovitch; Editing by Ken Wills & Kazunori Takada)

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