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In the Spotlight, China PM Sends Strong Signal

China, Chinese Flag
CNBC.com
China, Chinese Flag

China has wrapped up its nine-day 11th National People's Congress and if one thing has been evident, it's that Beijing knows how it's handling the current economic crisis is being scrutinized around the world.

That perhaps, is one reason why Premier Wen Jiabao was deliberate in his comments about China's holdings of U.S. Treasurys. Speaking to journalists after the conclusion of the NPC meetings, Wen admitted he is worried about the safety of those investments.

In a message partially directed at Washington, Wen called on the United States to “maintain credibility, honor its promises and guarantee the safety of Chinese assets.”

Analysts estimate that of the nearly $2 trillion China holds in foreign exchange reserves, about two-thirds is invested in U.S. government and agency debt.

With the Treasury about to issue billions more in bonds, the last thing Washington needs is for China to stop buying them. Even the threat of Beijing slowing down purchases of dollar assets is enough to spook markets. Not only does the U.S. need China to continue buying treasurys, it prefers China step up those purchases.

And Beijing knows that – hence the well-timed comments asking for additional reassurances. After all, just a few weeks ago, U.S. Secretary of State Hillary Clinton was in Beijing telling the Chinese those holdings were a reliable investment.

Up until the middle of last year, officials were more focused on preventing the Chinese economy from overheating. But when it became clear the western financial crisis was morphing into a full-blown synchronized global economic slowdown, Beijing made a fast U-turn.

“No one can complain the leadership took too long to respond,” says Xu Sitao from the Economist Group.

Wen, known to the masses as Grandpa Wen, and whose popularity soared because of his handling of last year's earthquake, has given repeated assurances that the Chinese economy will indeed grow by the government's stated target of 8 percent this year. This week's parliament meeting was carefully orchestrated to demonstrate the government's resolve and unity in tackling the current economic crisis.

The current economic crisis is likely to be the biggest test for China's leaders since opening its doors to capitalism in 1978.

“This crisis gives these guys the opportunity to think about their legacy,” says William McCahill, Vice-Chairman of JL McGregor & Company. Besides the $585 billion plan to boost the economy, Wen said the government is ready to spend more if needed.

If anyone understands the power of symbolism and imagery, it's China. The leadership has been quick to grasp that the most important thing it can do right now is to project an image of competence and confidence. Premier Wen said the government knows that “confidence is more important than gold or money.”

Contrast that with accusations that U.S. and European policymakers have dithered in their response to the financial crisis and implemented half-hearted piecemeal remedies to address the economic downturn. In China, you can rest assured there's adult supervision.

China knows the world is watching.

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