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Economy

China tries to head off tough questions at G-20

Zhou Xiaochuan, China's central bank chief

SYDNEY -- As officials from the world's biggest economies ready to gather here, China is trying to allay fears that its own growth rests on shaky foundations even as it pushes back against America on monetary policy.

     China's "shadow banking," a murky area of finance that operates outside the regulatory framework, has drawn international concern. In recent weeks, rumors of impending default have swirled around a number of high-yield investment products linked to these loans.

      People's Bank of China Gov. Zhou Xiaochuan looks unlikely to avoid the subject of reforming the Chinese economy when finance ministers and central bank chiefs from the Group of 20 meet here this weekend.

     For this reason, the central bank has been taking steps this week meant to reassure the world that China wants stable economic growth, too. It mopped up excess money-market liquidity on back-to-back days. Deputy Gov. Hu Xiaolian said the pace of financial reforms would quicken. The bank also decided to liberalize cross-border flows of renminbi from the Shanghai pilot free trade zone.

      Fearing embarrassment on the world stage, China typically tries to burnish its record of reform ahead of important international conferences. Before last July's G-20 meeting, Beijing abolished the floor under bank lending rates.

      This time, while emphasizing its focus on economic stability, China also seems to be sending a message to Washington on monetary matters. Chinese holdings of U.S. government debt fell by $47.8 billion, or 3.6%, from November to December, U.S. Treasury Department data shows. This marked the first decline in four months and the biggest in percentage terms since December 2011.

      Even so, China's pile of U.S. debt -- already the biggest in the world -- grew in 2013, reaching $1.26 trillion. Dollar assets make up nearly 70% of China's foreign exchange reserves, and December's sell-off is unlikely to prove the start of a trend. But Beijing seems to have taken the Federal Reserve's move to begin tapering monetary stimulus as an opportunity to show that China can pull money out of the U.S. when it wants to.

     China had a practical motivation, too: dollar assets looked poised to take a hit. But by dumping a chunk of Treasurys, China also seemed to be telling the Fed to give some consideration to emerging markets, which blame America's shift in monetary policy for triggering an exodus of investment. This has not been the case with China, which has been forced to grapple with an influx of investment money, and Beijing has avoided overtly criticizing the Fed's taper. But Chinese officials fear that ignoring emerging markets' troubles could endanger China's own economy, which has lost steam in recent years.

      These reassurances may not work. Recent economic indicators give reasons for concern about a further slowdown. Shadow banking continues to feed high levels of infrastructure and real estate development. Efforts to wean the economy off investment have been sluggish. Many outsiders see the risk of financial instability in China as a threat to the global economy.

 

 

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