Outside View

I am sad, though, that one of my role models for capitalism has been so damaged by its own "operating model".

As of December 31, 2008, China had invested a gigantic US$696 billion (Bt25 trillion) in US Treasuries.

China is more than justified in showing its worries. Prime Minister Wen Jiabao explicitly mentioned his concerns about China's investment in Treasuries, while at the same time US Secretary of State Hillary Clinton urged Beijing to buy more of US debt, which she claimed was a "safe" investment during her visit to China last month.

China will definitely come up with a diversification plan - if it has not done so already - in order to reduce the risk of its concentration in dollars. This could range from investing more in other forms of assets such as commodities to taking on more risky assets.

Any move resulting from the plan will definitely impact the global markets, especially foreign-exchange and US bond markets in this most difficult period, when President Obama needs to fund his $787 billion "rescue" of the US financial meltdown. The question is how America will react to such a plan.

The reallocation of Chinese assets will put more pressure on the dollar, not to mention the bond market.

The cost of Federal borrowing will get pricier. If so, it will be very interesting to see how much the US will tolerate.

The diversification away from US debt would also impact on the value of other currencies, which China believes are safe and convertible.

The euro, the yen and the Australian and New Zealand dollars therefore should benefit from this move.

I dare not mention that our Thai baht might also benefit from it. This can be the case but not by much, and would not be very significant in terms of impact anyway.

While the People's Bank of China maintains its stable yuan policy, the US administration may eventually retaliate against China by labelling it as a country that manipulates its currency, an accusation that has been frequently made over the years.

As I said at the very beginning, I am sad about the meltdown of super capitalism resulting from its own operating model. I will be even more regretful if the US reacts to actions that may be taken by China in such an unprofessional way. Rather, it should directly address the issues by securing the Treasuries as the real safehaven investment. Losing its shrine amidst this financial turmoil, the US dollar would only end up losing its status as the world's currency. Or is this going to be the beginning of the end, as we saw with the UK and sterling back in the 1950s?

Views expressed are the author's own.