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The Fed's move to buy up US Treasury bonds sets China and US up for a duel at G20

China and other leading nations say they view the Fed’s move to buy up $600 billion in US Treasury bonds, on top of earlier purchases, as timed to put them on the defensive at the G20 summit in Seoul.

By Donald KirkCorrespondent / November 8, 2010

A man walks by a screen showing flags of participating nations of the G20 summit at the venue for the summit meeting in Seoul, South Korea, Monday, Nov. 8. The US and China could be headed for an economic confrontation at the G20 summit, following a Fed plan to buy up US Treasury bonds.

Lee Jin-man/AP Photo

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Seoul, South Korea

A controversial move by the United States increased tensions Monday between the US and China over different views on what to do about yawning trade imbalances at the Group of 20 summit here this week.

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President Obama, in New Delhi at the end of the first leg of his 10-day Asian tour, rebuffed widespread international criticism of last week’s decision by the Federal Reserve Bank to buy up $600 billion in US Treasury bonds.

The Chinese, under strong US pressure to drastically revalue their currency, blasted the Fed’s move as an effort to depreciate the value of the dollar by printing more dollars. Why, Chinese officials asked, should they then have to revalue the Chinese yuan against the dollar, as the US has repeatedly demanded, in order to cut down China’s enormous trade surplus with the US?

Mr. Obama, as expected, stressed the benefits a strong US economy. “The Fed's mandate, my mandate, is to grow our economy,” he said. “That’s not just good for the United States, that's good for the world as a whole.”

That message was not convincing to the Chinese or to other major exporters.

The objections

The Germans, according to diplomatic sources, view the Fed’s move, on top of earlier purchases of $1.7 billion in US Treasury bonds, as a challenge deliberately timed to put them on the defensive at the G20 summit here Thursday and Friday at which leaders are supposed to come up with a consensus on what to do about huge global imbalances.

China’s vice finance minister, Zhu Guangyao, repeated Chinese objections Monday, charging that the US in the second round of “quantitative easing,” or QE2, “did not recognize its responsibility to stabilize global markets.” Nor, he said, did the US “think about the impact of excessive liquidity on emerging markets.”

The reference to “emerging markets” is especially important since China is seen as the leader of rising new economies that expect to play a much greater role in the G20 than was possible in the G7.

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