China slams US for QE2

China being the largest holder of US government debt, not surprisingly reacted angrily at the Fed's unabashed money-printing - which is sure to devalue their large reserves of US Dollar-denominated assets.

“As long as the world exercises no restraint in issuing global currencies such as the dollar ... then the occurrence of another crisis is inevitable” - Xia Bin, advisor to China's central bank.

"As a major reserve currency issuer, for the United States to launch a second round of quantitative easing at this time, we feel that it did not recognize its responsibility to stabilize global markets and did not think about the impact of excessive liquidity on emerging markets." - Finance Vice Minister Zhu Guangyao

China chides "deteriorating debt repayment capability" & "fundamentally lowering ... national solvency"


China caught in a bind :

China cannot just dump the US Dollar, being the only international reserve currency, for now. It can't switch out of Dollar into Gold in a big way - that would drive up the gold price dramatically. It can't transfer to high-growth currencies like Aussie Dollar or Brazilian Real - that would cause such appreciation of these currencies that China's imports of natural resources become more expensive.

Therefore, China's central bank is left with these options :

1. buy Euro or Yen assets - but that would drive these currencies up and the chinese Yuan down & provoke Europe and Japan to accuse China of currency manipulation
2. buy natural assets like oil, gas, mines in other countries - but this stirs nationalist sentiments against foreign ownership of natural resources
3. equity investment or partnership with strong companies - like Berkshire Hathaway, Goldman Sachs, JP Morgan etc

Beyond the immediate term, it's more likely China would further its proposal of an alternative international monetary system - one not based on the paper currency of a single country.