Increased borrowing by the United States to fund the 787-billion-dollar stimulus package that President Obama signed into law Tuesday could lead to a record US deficit that hits Chinese-held assets, it said in a report.

"To rescue the ailing US economy by increasing government borrowing will create a record-high federal deficit," the official agency said, quoting Yu Zuyao, an economist with a top government think tank.

"This can further lead to catastrophic consequences such as serious inflation and US dollar depreciation," it quoted Yu, of the Chinese Academy of Social Sciences, as saying.

China's forex reserves, largely invested in US treasury bonds and other dollar-denominated assets, could be exposed to significant risks, Yu said.

China has the world's biggest forex reserves, which reached 1.95 trillion dollars by the end of 2008.

It overtook Japan as America's biggest foreign creditor in September and at the end of 2008 held 696.2 billion dollars in US government bonds, up from 477.6 billion dollars at end-2007, US treasury figures showed.

"US dollar depreciation is inevitable in the long run. China should prepare and reduce its holdings of US Treasuries to a proper size," Zuo Xiaolei, an analyst with Galaxy Securities in Beijing, warned in the Xinhua report.

She added that Beijing should instead switch to more investments in energy and other resources.

By virtue of its appearance on the state-controlled Xinhua news agency, the report likely reflects the opinion of China's central government.

With prospects for a US economic recovery dim and further deterioration possible, Washington's stimulus package looked irresponsible, Xinhua quoted others as saying.

"The United States should be more responsible in addressing the global financial crisis," said Zhang Yansheng, a researcher at the National Development and Reform Commission, China's top economic planning body.

"The US economic stimulus plans should focus more on maintaining financial and currency stability," he said.

A weaker U.S. dollar would hurt that currency's international status, he said, which would "not be in the interests of the United States and other countries and would exacerbate the crisis," Zhang was quoted as saying.

earlier related report
Chinese leaders: Spend, spend, spend!
Beijing (AFP) Across China, communist party officials are handing out millions of food, shopping, and cinema coupons in an effort to get people to go out, have a good time and spend, spend spend.

Chinese people are among the world's most determined savers, with economists estimating they put away 30 to 40 percent of their disposable income, but a virtue can be an obstacle when trying to jump-start the economy.

So while multi-billion-dollar spending programmes on infrastructure projects and interest rate cuts have stolen the headlines in China in recent months, the humble coupon has quietly emerged as another popular stimulus weapon.

Chengdu, the capital of quake-hit Sichuan province, was one of the early coupon pioneers, giving more than 379,000 low-income residents nearly 39 million yuan worth of vouchers in December.

The eastern city of Hangzhou also last month gave 670,000 low-income residents 100 million yuan (14.6 million dollars) in vouchers to spend in shops and entertainment centres.

"The principle of putting money in people's pockets has been applied literally," Jing Ulrich, JP Morgan's head of China equities mused in a research note.

"Consumption coupons could become more common as an alternative to income tax cuts -- which might only encourage greater savings," she wrote.

Poor families and retired people in Hangzhou were given ten 20-yuan coupons to spend in shopping centres while students received five 20-yuan coupons. They were encouraged to use them within three months, after which point they can be used, but at fewer stores.

Some businesses offered extra discounts to draw in coupon users. Cinemas, for instance, were offering half price tickets for coupon users.

Hangzhou -- famous for the scenic views of its West Lake -- is also giving residents in neighbouring provinces and cities, including Shanghai, 40 million yuan worth of coupons to spend at its hotels, resorts and restaurants.

The Hangzhou government is even considering paying its employees up to a tenth of their salaries in coupons, according to the government's website.

The efforts to boost consumption come as the global financial crisis has hammered consumer confidence in China down to its lowest level in six years.

A confidence index compiled by China-based research group Horizon stood at 59.9 at the end of 2008, a decline of 4.5 points from September, state media reported.

The last time it sank that low was after the outbreak of Severe Acute Respiratory Syndrome, or SARS, in 2003.

It is too soon to gauge the coupons' impact. The latest retail sales figures show 290 billion yuan (42.4 billion dollars) was spent nationwide during the week-long Lunar New Year holiday.

That was up 13.8 percent from the same period last year, but growth had slowed down from 16 percent in 2008.

Coupons can only be effective for a short time, cautioned Shi Jianxun, an economist with Shanghai's Tongji University.

"After cash coupons are given out, you have a one-off stimulus. As people use up coupons, you have to give out more each month to sustain the boosting effect," he said.

For a lasting solution, China has to resolve imbalances that have led to urban incomes growing on average at a third of the rate of government revenues, with rural incomes lagging even further behind, Shi said.

A woefully inadequate social safety net, meaning people especially in rural areas have to save as much as they can to pay for life in their old age and health care, is one of the big problems.

"China should revamp its national income structure and change the situation of 'rich nation poor citizens' by collecting less taxes and improving social security," Shi said. "Then people would not have save so much."

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