Commentary says China not a "savior" for Europe (Reuters)

BEIJING (Reuters) – Europe should not expect China to ride to the rescue as its "savior" from the debt crisis, though Beijing will do what it can to help a friend in need, state-run news agency Xinhua said in a commentary on Sunday.

The head of Europe's rescue fund sought to entice China on Saturday to invest in the facility by saying investors may be protected against a fifth of initial losses and that bonds could eventually be sold in yuan if Beijing desires.

Though China has expressed confidence that Europe can survive its crisis, it has made no public offer to buy more European government debt.

Xinhua, in an English-language commentary, said China could not stand by while its largest trading partner foundered.

"Beijing's good-will gesture is a good response to those who see China as a threatening rival to Europe. Despite differences in politics, economy and culture, China and the EU are still good friends and partners," it wrote.

"However, amid such an unprecedented crisis in Europe, China can neither take up the role as a savior to the Europeans, nor provide a 'cure' for the European malaise," Xinhua added.

"Obviously, it is up to the European countries themselves to tackle their financial problems. But China can do within its capacity to help as a friend."

Such commentaries offer an insight into government thinking, even if they do not reflect official policy.

China's pile of $3.2 trillion in foreign exchange reserves, the biggest in the world, keeps growing thanks to trade surpluses and capital inflows.

Analysts estimate that China holds about a quarter of its foreign exchange in euro assets and there are few other places for it to park investments of such a scale.

The government has said it has confidence in the euro and in the European Union's efforts to tackle the crisis. But comments from Chinese economists and in state media have also revealed anxieties about the security of euro assets.

Expanding the European Financial Stability Facility (EFSF) to 1 trillion euros is key to the euro zone's latest anti-crisis plan, put together at a Eurozone summit last week.

Details on how this would be done have yet to be finalized and European leaders are under pressure to show the plan will work.

Xinhua said Europe needed to make "more concerted efforts".

The G20 summit in Cannes next month should accord China the respect it deserves, the commentary added.

"It is advisable that at the summit European leaders take heed of the voices of emerging economies, whose remarkable contribution to world economic recovery and growth deserves better understanding and reciprocal treatment."

(Reporting by Ben Blanchard; Editing by Ron Popeski)

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Why China 'trade war' bill is tying House Republicans in knots (The Christian Science Monitor)

Washington – The bill to punish China for manipulating its currency – and allegedly stealing American jobs – is setting off a clash within Republican ranks on Capitol Hill.

The bill, which would impose tariffs on Chinese goods, has already passed the Senate with bipartisan support and would likely pass the House if brought to the floor. But so far, House Speaker John Boehner refused to do so.

With multinational corporations and conservative antitax groups – key Republican constituencies – opposed to the bill, Mr. Boehner has been loath to let it see the light of day, given that it could be vetoed by President Obama anyway.

How much do you know about China? Take our quiz.

But pressure on Boehner is mounting. Lawmakers representing states hardest hit by the rise of Chinese manufacturing want to go on the record supporting the bill, and GOP presidential hopeful Mitt Romney has taken a stand on China currency even more aggressive than the Senate bill.

Boehner has called the measure “very dangerous.” His concern is that raising tariffs on Chinese goods could spark a damaging trade war at a time when the economy is ill-suited to absorb another blow.

“I have made my position pretty clear that I’ve got grave concerns about this bill,” he added at a briefing on Wednesday. For Congress to act now “poses a very severe risk of a trade war and unintended consequences that could come as a result.”

RECOMMENDED: How much does US-China trade hurt American workers? Slowly, a clearer picture.

Boehner is asking the president to stick his neck out and clarify whether he would veto the bill. a€?Ita€?s time for the president to lead,a€

China's manipulation of its currency has long angered Washington. But the current jobs crisis has given the issue added impetus. Backers of the bill say that, by keeping the value of its currency artificially low, China gives its goods as much as a 30 percent price edge in US markets and a comparable disadvantage for American goods in China. The Senate bill would authorize economic sanctions if a trading partner is found to be maintaining its currency at an artificially low level to gain a trade advantage.

China has already signaled its displeasure. It let the value of its currency sink for the second day in a row on Thursday – a move analysts interpret as a rebuff of the Senate vote.

For their part, major US corporations are also worried.

“The American companies who have become invested in China don’t want change,” says Peter Morici, former chief economist at the US International Trade Commission and a professor at the University of Maryland.

“American companies like GE and Caterpillar, who have outsourced American jobs and corporate functions to China and are now clients of Beijing’s protectionism, have convinced President Obama the China currency bill is protectionist and would start a trade war,” he adds.

Technically, the bill has already come to the House floor for a vote. But Democrats brought it up via a highly partisan legislative procedure that would have also forced Republicans to vote against a popular trade bill with Colombia, so the motion failed. But GOP senators are pushing House Republicans to take up the bill themselves.

“You’re miscalculating where the country is on this issue,” said Sen. Lindsey Graham (R) of South Carolina, in remarks addressing House Republicans at a briefing on Wednesday. South Carolina has lost some 41,800 jobs due to trade with China since 2001, according to a recent report by the Economic Policy Institute.

A critical mass of House Republicans are on record supporting the aims of the Senate bill. A similar House measure attracted 63 Republican sponsors, despite opposition from House GOP leaders. Overall, the bill has 225 sponsors – enough to pass the bill.

In 2010, when the House was in Democratic hands, 99 Republicans voted to back a similar bill, which passed, 348 to 79, but was never taken up by the Senate.

Supporters say that if a currency vote is to occur in the House this time, it’s going to require action on the presidential level – or a stronger push from public opinion. If Obama commits to signing the bill, it puts renewed pressure on House GOP leaders.

At the same time, should former Massachusetts Governor Romney pick up momentum in the GOP primary, his outspoken stands on China trade could also have more sway with House Republicans.

In his economic plan, released Sept. 5, Romney called for confronting China on trade abuses. He pledges on Day 1 to issue an executive order listing China as a currency manipulator and directing the Department of Commerce to assess countervailing duties on Chinese imports, if China does not quickly move to float its currency.

“I'm afraid that people who've looked at this in the past have been played like a fiddle by the Chinese,” said Romney at a presidential debate in Hanover, N.H., on Tuesday. “And the Chinese are smiling all the way to the bank, taking our currency and taking our jobs and taking a lot of our future. And I'm not willing to let that happen.”

“Governor Romney last night couldn’t have been clearer,” said Sen. Jeff Sessions (R) of Alabama, a Senate sponsor of the China currency bill. “I was very pleased with what he said.”

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House Democrats vow continued push on China bill (Reuters)

WASHINGTON (Reuters) – Democratic lawmakers vowed on Friday to keep pressing for a vote on China currency legislation, now blocked by Republican leaders, which they said is vital for U.S. competitiveness in global markets.

"It is estimated that currency manipulation costs our economy over a million jobs," said Steny Hoyer, the No. 2 in the House of Representatives Democratic leadership. "I urge the Republican leadership to put the currency bill on the floor."

Earlier this week, the Senate voted 63-35 to pass a bill aimed at China by allowing companies to seek U.S. government "countervailing duties" against goods from countries with undervalued currencies.

Many U.S. lawmakers contend that China undervalues its currency by as much as 15 to 40 percent to give its companies an unfair price advantage in international trade.

House Speaker John Boehner says he fears the bill could start a trade war and has refused to bring it to the floor for a vote, even though a similar measure passed the House last year 348-79.

"They don't want this bill on the floor for one reason: it would pass," said Representative Sander Levin, the top Democrat on the House Ways and Means Committee. "The speaker should let the House work its will."

Representatives Tim Ryan and Betty Sutton, two Democrats from Boehner's home state of Ohio, also said they had no intention of letting the issue drop.

Democrats hope Republican lawmakers will hear from constituents on the issue when they return to their districts next week.

The Obama administration says it shares the goal of the legislation, which is getting China to revalue its currency. But it has raised concern that some provisions in the Senate bill could violate World Trade Organization rules.

Meanwhile, the Treasury Department faces a Saturday deadline to issue an semi-annual report on whether any country is manipulating its currency for an unfair trade advantage.

The Obama administration, in five previous reports, has pushed China to move more quickly to revalue its currency. However, it has declined to take the step of formally labeling China a currency manipulator.

(Editing by Vicki Allen)

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Obama hits China on trade; cautious on currency bill (Reuters)

WASHINGTON (Reuters) – President Barack Obama accused China on Thursday of "gaming" international trade by keeping its currency weak, but was cautious about a bill before the U.S. Senate aimed at pressing Beijing to revalue the yuan.

Obama stopped short of explicitly backing legislation that calls for U.S. tariffs on imports from countries with deliberately undervalued currencies, and he restated concerns that any measure must comply with global trade rules.

Still, in his toughest language on China to date, the president echoed sponsors of the bill, which is heading toward a final Senate vote that could come later on Thursday. The measure, which has drawn warnings from Beijing that it could trigger a trade war, is widely expected to pass.

"China has been very aggressive in gaming the trading system to its advantage and to the disadvantage of other countries, particularly the United States," Obama told a news conference focused on his bid to revive a weak U.S. economy.

"Currency manipulation is one example of it," he said.

Obama, who faces a tough bid for re-election next year, did not say whether he would sign or veto the legislation if it reached his desk. Both the Senate and the House would have to approve the measure first.

"My main concern ... is whatever tools we put in place, let's make sure that these are tools that can actually work, that they're consistent with our international treaties and obligations," Obama said.

"I don't want a situation where we're just passing laws that are symbolic knowing that they're probably not going to be upheld by the World Trade Organization," he said.

The authors of the bipartisan Currency Exchange Rate Oversight Reform Act insist the bill complies with WTO rules.

BOEHNER CALLS BILL "WRONG" AND "DANGEROUS"

Many economists say China holds down the value of its yuan currency to give its exporters an edge in global markets. China says it is committed to gradual currency reform and notes that the yuan has risen 30 percent against the dollar since 2005.

The Senate voted 62-38 on Thursday to curtail debate and send the bill toward a final vote in that chamber.

Supporters say that decision, which required a super-majority of 60, virtually guarantees Senate approval, but the bill faces stronger opposition in the House of Representatives and may never be brought to a vote.

"For the Congress of the United States to pass legislation to force the Chinese to do what is arguably very difficult to do I think is wrong, it's dangerous," House Speaker John Boehner said on Thursday.

"You could start a trade war," he warned.

Boehner has the power to block the bill in his chamber, even though backers of the legislation say it has 225 House co-sponsors, including 61 Republicans -- enough for passage if it came to a vote.

Top House Democrats lost no time in stepping up pressure on Boehner.

"Now is the time for the House Republican leadership to stand with American workers by allowing the House to pass the bipartisan China currency bill, and put more Americans back to work," House Democratic leader Nancy Pelosi said in a statement.

Obama touted his administration's record on pursuing trade cases before the World Trade Organization with the Chinese and others as "more aggressive than any in recent years." But he also noted he had taken great pains to stabilize ties with China that have been dogged by disputes over trade, human rights and U.S. arms sales to Taiwan.

VOTES VS. DIPLOMACY DILEMMA

If the House were to pass the bill, Obama would face a dilemma. Many Americans blame China's $260 billion trade surplus as one reason the U.S. unemployment rate is stuck above 9 percent.

The bill could hit Obama's desk just weeks before he hosts Chinese President Hu Jintao at a regional economic forum in Hawaii and meets Hu again at an Asian summit in Indonesia.

But vetoing the bill ahead of those November summits will not play well in industrial heartland states like Ohio and Michigan, which Obama likely needs to win a second term. A leading Republican candidate, Mitt Romney, has vowed to crack down on China over currency.

"I think Obama would prefer not to take a position, but if he wants to be consistent with his past policies and statements, he will sign the bill," said Scott Paul, executive director of the Alliance for American Manufacturing, a bill supporter.

"I don't think Obama wants to be outflanked on this," he said.

Obama said he believed "a win-win trading relationship with China" was possible.

But he said competing with the world's second-biggest economy requires Washington to "make sure that we're aggressive in looking out for the interests of American workers and American businesses and that everybody is playing by the same rules and that we're not getting cheated in the process."

Underscoring that stance, U.S. Trade Representative Ron Kirk on Thursday accused China of flouting WTO rules by failing to notify the world trade body of nearly 200 Chinese government subsidy programs.

"The situation was simply intolerable," Kirk said in a statement, which also scolded India for being delinquent with the subsidy reports.

(Additional reporting by Jason Lange, Andy Sullivan and Donna Smith; Writing by Paul Eckert; Editing by Philip Barbara

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Top Republican says bill on China yuan is "dangerous" (Reuters)

WASHINGTON (Reuters) – A U.S. bill to pressure China into letting its currency rise in value, which has drawn warnings from Beijing of a possible trade war, ran into opposition from the top Republican in Congress on Tuesday.

The strong misgivings of House of Representatives Speaker John Boehner were the first clear sign the currency legislation might fizzle out, as similar bills have done since lawmakers began targeting China's yuan policy in 2005.

"I think it's pretty dangerous to be moving legislation through the United States Congress forcing someone to deal with the value of their currency," Boehner told reporters.

"While I've got concerns about how the Chinese have dealt with their currency, I'm not sure this is the way to fix it."

On Monday, the U.S. Senate voted to open debate on a bill that calls for U.S. tariffs on imports from countries with deliberately undervalued currencies, prompting an angry rebuke from China.

House speakers normally get their way on legislation. But this time Boehner has to contend with signs of growing support from rank-and-file members of his own party for the currency bill and tough talk about China from top Republican presidential candidate, Mitt Romney.

Democrats piled the pressure onto Boehner, urging him to keep a promise he made when he took office in January and let the House to "work its will.

"For some inexplicable reason, the Republican leadership in the House is siding with the Chinese government. This is not the time to go soft on Beijing," said Democratic Senator Charles Schumer, a co-author of the currency bill.

"The Chinese only understand one thing: being tough," he said on the Senate floor, rejecting calls from other senators for multilateral talks.

China has accused lawmakers of pandering to U.S. voters ahead of next year's presidential and congressional elections.

China's central bank and the ministries of commerce and foreign affairs accused Washington of "politicizing" currency issues and putting the global economy at risk of a trade war.

U.S. critics of the bill have also warned it could stoke trade tensions just as the world economy is facing a sharp slowdown in growth.

In a hint of unease about the bill at the White House, a top U.S. official said the Obama administration has begun discussions with lawmakers about whether it is "the right approach" to the long-running currency issue.

Acting U.S. Commerce Secretary Rebecca Blank told CNBC television the best solution to what American officials view as an undervalued Chinese currency remains "an open question," despite signs of bipartisan support for legislation that has raised angry warnings of a potential trade war from Beijing.

"The administration is talking with people in the Senate about whether this bill is the right approach or whether there are other approaches to take," she said.

ANGRY CHINESE RESPONSE

White House spokesman Jay Carney said the administration was still reviewing the currency bill.

"We share the concerns of members (of Congress) about the valuation of the currency and the need to appreciate it," he told reporters aboard Air Force One. The administration wanted to be sure any measure met U.S. "international obligations."

Senators voted 79-19 on Monday to open a week of debate on the Currency Exchange Rate Oversight Reform Act of 2011, which would allow the U.S. government to slap countervailing duties on products from countries found to be subsidizing their exports by undervaluing their currencies.

Many of the world's top economic policymakers have long urged China to allow its currency to strengthen as a way to help fix the imbalances in the global economy that have been blamed for contributing to the financial crisis of 2007-09.

Federal Reserve Chairman Ben Bernanke told U.S. lawmakers on Tuesday the yuan policy, as well as contributing to high inflation in China, hindered "a more balanced growth path."

Many economists say China holds down the value of its yuan currency to give its exporters an edge in global markets. China says it is committed to gradual currency reform and notes that the yuan has risen 30 percent against the dollar since 2005.

In an argument that has gained traction with U.S. unemployment stuck above 9 percent and as 2012 elections draw near, supporters of the bill say that if the yuan was allowed to rise, U.S. exports to the fast-growing Chinese market would increase, cutting an annual trade gap of more than $250 billion and creating jobs in the United States.

Republicans are split on the yuan issue. Many lawmakers in the party traditionally oppose actions that might violate free trade principles. But Republican presidential hopeful Romney has said he would name China a currency manipulator on his first day in office if elected.

Despite Boehner's expressed doubts about the bill, backers of the legislation in the House said the measure now has 225 co-sponsors, including 61 Republicans. The bill is expected to face a vote in the Democrat-led Senate later this week.

(Additional reporting by David Morgan, Tom Ferraro and Laura MacInnis; Writing by Paul Eckert; Editing by Mohammad Zargham, Vicki Allen and Eric Walsh)

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China says didn't know of arms sales talks with Gaddafi forces (Reuters)

BEIJING (Reuters) – Chinese arms firms held talks with representatives of Muammar Gaddafi's beleaguered forces in July over weapons sales, but behind Beijing's back, the Chinese Foreign Ministry said on Monday.

The revelation is nonetheless likely to deal a fresh blow to China's already delicate relations with Libyan rebel forces that have ousted Gaddafi.

The ministry confirmed the gist of reports in the Globe and Mail and the New York Times that documents found in the Libyan capital, Tripoli, indicated that Chinese companies offered to sell rocket launchers, anti-tank missiles and other arms with a total of some $200 million to Gaddafi's forces, despite a U.N. ban on such sales.

A ministry spokeswoman, Jiang Yu, said members of Gaddafi's government had come to China and held talks with a "handful" of Chinese arms company officials without the knowledge of the government.

"We have clarified with the relevant agencies that in July the Gaddafi government sent personnel to China without the knowledge of the Chinese government and they engaged in contact with a handful of people from the companies concerned," Jiang told a news briefing in Beijing.

"The Chinese companies did not sign arms trade contacts, nor did they export military items to Libya," Jiang said. "I believe that the agencies in charge of the arms trade will certainly treat this seriously."

Even if the arms talks were behind Beijing's back, the controversy could intensify mistrust between Beijing and the rebels seeking to defeat Gaddafi's shrinking forces and claim control of all Libya.

"We have hard evidence of deals going on between China and Gaddafi, and we have all the documents to prove it," a rebel military spokesman, Abdulrahman Busin, told the Times.

The arms issue comes on the heels of tensions between Beijing and the Libyan rebels over frozen funds.

On the weekend, the head of Libya's rebel National Transitional Council (NTC), Mustafa Abdel Jalil, said China had obstructed the release of some of Libya's frozen assets.

Although China agreed with other powers last week to unfreeze $15 billion of Libyan assets abroad, it opposed handing control of more to the interim ruling council, according to Libyan rebel spokesman Shamsiddin Abdulmolah.

"In principle, we don't have a problem" with unfreezing funds, said the Chinese spokeswoman Jiang.

"But out of a responsible attitude, we and some members of the Security Council want further explanation and information from the applicant countries about the uses of the funds and oversight of them," she said.

Libya's interim council has promised rewards for those who took a leading role in backing the revolt against Gaddafi, and that has raised concerns that China could be disadvantaged.

China is the world's second-biggest oil consumer and last year obtained 3 percent of its imported crude from Libya.

China did not use its U.N. Security Council veto power in March to block a resolution that authorized the NATO bombing campaign against Gaddafi's forces, but it condemned the expanding strikes and repeatedly urged compromise between his government and the rebels.

By the time of the visit by Gaddafi's officials, China was already courting the Libyan rebels. But China has not joined Western powers in formally recognizing the NTC as the legitimate authority in Libya, but has acknowledged its "important role" after Gaddafi's ousting.

The reports said Libyan security officials visiting China in July were received by three arms companies, including Norinco and the China Xinxing Import and Export Corporation.

Norinco has faced sanctions from the United States, which accused it of selling missile parts to Iran, in spite of Beijing's arms control rules.

Asked if the Chinese companies or their personnel could be punished over the talks with Gaddafi's officials, Jiang said: "I'm sure that the agencies in charge of Chinese arms (sales) will deal with this in a serious and conscientious way."

(Reporting by Chris Buckley; Editing by Nick Macfie)

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Bank of America to sell China bank stake for $8.3 billion (Reuters)

CHARLOTTE, N.C./HONG KONG (Reuters) – Bank of America Corp is selling about half its stake in China Construction Bank for $8.3 billion, in its latest effort to shed assets and boost capital.

A group of investors is buying 13.1 billion CCB shares from Bank of America, with the deal expected to close in the third quarter. The U.S. bank declined to name the investors but two sources said Singapore state fund Temasek was among the buyers.

Bank of America needs to boost capital by some $50 billion in the coming years to meet new global rules, according to multiple analyst estimates.

CCB is the second-largest bank by market value in the world, and Bank of America's ties with the Chinese bank are seen as an important source of future growth. Bank of America's willingness to sell part of its CCB investment shows how far it must go to meet new capital requirements, analysts said.

"Bank of America's decision to sell that stake is wrong strategically in the long run, but they need money," said Josef Schuster, founder of Chicago-based IPO research and investment house IPOX Schuster.

The bank has said it can raise the money through earnings and selling off assets, but a number of investors have expressed concern that the bank will need to issue more common shares.

Those dilution concerns helped push the bank's shares this month to their lowest level in two-and-a-half years. Investors are also concerned about the bank's potential losses from mortgages and related litigation. A $5 billion investment from Warren Buffett's Berkshire Hathaway stopped that fall last week.

In the CCB, deal, Bank of America sold each share for HK$4.93, an 11 percent discount to the Chinese bank's most recent closing price of HK$5.55.

Bank of America's shares were up 6.1 percent at $8.23 on news of the sale on Monday afternoon.

A START

Bank of America will record a $3.3 billion gain in the third quarter as a result of the sale, and a $3.5 billion increase to its core capital under current rules, a spokesman said.

Under proposed Basel III rules, the sale will generate an $8.3 billion gain for Bank of America. The bank will also be required to hold less capital against the CCB shares, because it will now own about 5 percent of the holdings, less than the 10 percent level that triggers higher capital requirements under Basel III.

The CCB stock sale is the latest in a series of moves by the largest U.S. bank to increase capital before Basel III takes effect.

"It really doesn't move the needle under current rules," said Jefferson Harralson, bank analyst with Keefe, Bruyette & Woods Inc. "But this starts to move them to where they need to be."

Bank of America in recent weeks has agreed to sell an $8.6 billion Canadian credit card portfolio to TD Bank Group and is in talks to sell $1 billion of real estate assets to Blackstone Group.

In the last six quarters, Bank of America has generated some $30 billion of proceeds from asset sales, as it has sold a range of assets from a foreclosure insurance unit, investments in Latin and South American banks, and U.S. mortgage-servicing rights.

Fears about the bank's ability to meet its capital requirement have cut the bank's stock price by a third since the beginning of August, including a 20 pct plunge on August 8.

Bank of America paid $3 billion for a 9.9 percent stake in CCB, the world's No. 2 bank by market value, before the Chinese lender's IPO in 2005.

The U.S. bank increased its holdings in following years to 25.6 billion shares, including 23.6 billion that came out of lock-up on August 29.

It is free to sell the remaining shares in 2013.

(Reporting by Joe Rauch, additional reporting by Saeed Azhar in Singapore; Lauren Tara LaCapra in New York and Elzio Barreto in Hong Kong; Editing by Derek Caney and Matthew Lewis)

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Biden tells China not to count out U.S. strength (Reuters)

CHENGDU, China (Reuters) – U.S. Vice President Joe Biden on Sunday rejected views that American power is waning and said Washington would never default, wrapping up a China visit that has played down tensions between the world's two biggest economies.

"We are still the single best bet in the world, in terms of where to invest," Biden told a university audience in Chengdu, the provincial capital of Sichuan, the southwest province that is the second and last stop of his visit to China.

"Please understand that no one cares more about this than we do, since Americans own 87 percent of all our financial assets and 69 percent of all our treasury bonds," Biden said, answering a question about U.S. debt.

"So our interest is not just to protect Chinese investment. We have an overarching interest in protecting the investment, while the United States has never defaulted and never will default."

"You're safe," he added.

Biden also used his speech to renew U.S. calls for Beijing to do more to rein in North Korea and Iran, whose nuclear ambitions have alarmed the West.

"The fact is, China and the United States face many of the same threats and share many of the same objectives and responsibilities," he said.

But his key theme was, as it has been throughout his five-day visit to China, economic: that the United States can reverse its high debt and low growth, and that China should play a part by buying more American-made goods and services.

"I also know that some of you are skeptical about America's future prospects. With that in view, I would like to suggest that I respectfully disagree with that view and will allay your concerns," said Biden.

He told the audience to remember that the United States was by far the largest economy in the world, about two and a half times as large as China's.

Biden and President Barack Obama, both Democrats, face re-election next year. Biden said the debate with Republicans over how to tackle U.S. fiscal problems would be at the heart of the 2012 presidential election.

Chinese Vice President Xi Jinping, who is virtually certain to succeed Hu Jintao as Chinese President in early 2013, has hosted Biden during this visit. Obama administration officials have said they want to build trust with Xi ahead of the transition that begins in late 2012, when Hu gives up his post as general secretary of the ruling Communist Party.

Next year would need careful political footwork from both governments, said Biden.

"Both our countries are going through a political transition in 2012. It is very important, in my view, that we both are aware of the political sensitivities in each of the countries as they go through that," he said.

"NOTHING TO WORRY ABOUT"

Sichuan province is a fast-growing example of the inland development that Beijing hopes will power the Chinese economy in coming decades -- and also a slice of the rising consumer power that Washington hopes will buy more U.S. goods and reduce a huge trade deficit with China.

With 80 million people, Sichuan enjoyed economic growth of 15.1 percent last year, according to government statistics.

Such economic concerns have dominated Biden's visit to China, which began on Wednesday, and has featured a succession of unusually vocal declarations of Beijing's confidence in the U.S. economy, despite Standard & Poor's recent downgrade of the sovereign credit rating of the United States.

China has quarreled with the United States on trade, Internet censorship, human rights and U.S. arms sales to Taiwan. While those thorny disputes have not disappeared, they appear to have been overtaken by a shared desire to show confidence and cooperation to a jittery global economy.

In Sichuan, Biden raised human rights in general terms.

"Liberty unlocks a people's full potential, and in its absence, unrest festers," he told the university audience.

Biden told Premier Wen Jiabao on Friday that China had "nothing to worry about" over the safety of its holdings of Treasury debt, and Wen voiced confidence in the resilience of the U.S. economy, troubled by debt worries and sluggish growth.

Analysts estimate two thirds of China's $3.2 trillion in foreign exchange reserves, the world's largest, are in dollar holdings, making it the biggest U.S. foreign creditor.

Biden will fly to Mongolia on Monday morning for a day before heading onto Japan.

(Writing and additional reporting by Chris Buckley and Michael Martina in Beijing; Editing by Yoko Nishikawa)

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China protests U.S. spy flights near its coast (Reuters)

BEIJING (Reuters) – China warned that recent U.S. surveillance flights near its coast have severely harmed mutual trust and were a major obstacle to better military ties between the two countries, state media reported Wednesday.

Admiral Mike Mullen, chairman of the U.S. Joint Chiefs of Staff, vowed Monday to press ahead with surveillance flights near China despite opposition from Beijing, after an intercept by Chinese fighter jets of a U.S. spy plane on June 29.

"We demand that the U.S. respect China's sovereignty and security interests and take concrete measures to boost a healthy and stable development of military relations," the Global Times newspaper quoted the Ministry of National Defense as saying.

Xinhua news agency later quoted ministry spokesman Geng Yansheng as saying the reconnaissance missions "have severely undermined mutual trust and remained a major obstacle to the development of military ties.

There have been conflicting accounts of where the June 29 incident happened.

Taiwan's defense ministry said Monday that two Chinese fighter jets briefly crossed a line in the center of the Taiwan Strait that is considered an unofficial boundary between the airspace of both sides.

The fighter jets were attempting to intercept a U.S. U-2 reconnaissance plane, according to Asian media reports.

But the Pentagon said Wednesday the June 29 Chinese intercept did not take place in the center of the Taiwan Strait. One U.S. official, speaking on condition of anonymity, said it happened in international airspace over the East China Sea, north of Taiwan and the Taiwan Strait.

Regardless, relations between the U.S. and Chinese militaries have been rocky. China is unhappy with U.S. reconnaissance patrols near its coast and is suspicious of U.S. bases in South Korea and Japan.

China's rapid military buildup, including its growing aircraft carrier program, and its territorial disputes in the South China Sea have sparked concerns in the region.

The United States wants greater military transparency from Beijing over the military modernization and has warned about China's growing missile and cyber capabilities.

Self-ruled Taiwan, claimed by China as part of its sovereign territory, has been another major irritant in military relations. China has been furious about a 2010 package of U.S. arms sales to Taiwan worth up to $6.4 billion.

(Reporting by Ben Blanchard in Beijing and Phil Stewart in Washington; Editing by Ron Popeski and John O'Callaghan)

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China sacks 3 senior officials after high-speed train crash (Reuters)

WENZHOU, China (Reuters) – China sacked three senior railway officials Sunday after a collision between two high-speed trains killed at least 43 people and raised new questions about the safety of the fast-growing rail network.

A bullet train Saturday night hit another express which lost power following a lightning strike, state media said, in the country's deadliest rail disaster since 2008.

The power failure knocked out an electronic safety system designed to alert trains about stalled locomotives on the line.

As rescue teams and firefighters with excavators searched for survivors, state television said a 4-year-old boy and a male toddler had been pulled alive from the wreckage.

It was not known how many people were on the trains, which collided on a bridge near the city of Wenzhou in Zhejiang province, some 860 miles south of Beijing.

"The task for us now is to clear the debris and also to check for survivors in those areas that we have not gone to," said 35-year-old rescue worker Wang Jun. "Also, we are trying to get the railway line to be operational again."

Authorities moved quickly to assuage public anger by sacking the head of the Shanghai railway bureau, his deputy and the bureau's Communist Party chief, the Railways Ministry said in a statement on its website (www.china-mor.gov.cn).

The three will "also be subject to investigation," the statement added.

Vice Premier Zhang Dejiang, visiting the scene, "pledged that the investigators will find out the cause of the accident and those responsible will be seriously punished according to the law," the official Xinhua news agency reported.

Rescuers found more bodies Sunday afternoon, bringing the death toll to 43. Almost 200 people remain in hospital, 12 of them in critical condition, Xinhua said.

Two foreigners died in the accident, according to the semi-official China News Service, including a woman in her 20s.

Rail is the most popular method of long-distance transport in China and trains are usually crowded with as many as 1,000 passengers.

The reliability of China's rail network was called into question recently when the flagship Beijing-Shanghai high-speed line suffered a series of power outages soon after opening to great fanfare a month ago.

China's rail network has also been hit by a series of scandals. Three railway officials have been investigated for corruption this year, according to local media reports.

In February, Liu Zhijun was sacked as railways minister for "serious disciplinary violations." He led the rail sector's investment drive over the past decade.

Chinese internet users took to popular Twitter-like microblogging site Weibo to vent their anger about the accident, with some calling for Railways Minister Sheng Guangzu to resign, posting his picture online with a large red cross through it.

"The Railways Ministry should realize that passengers are not just little white mice," wrote Yang Chunxiao.

"Do you think officials are really trying to help? It's all for show," added A Cige.

"FLYING INTO THE AIR"

One train was heading from Beijing to the coastal city of Fuzhou, and the other was running from Hangzhou to Fuzhou.

Both trains were made by China South Locomotive and Rolling Stock Corp Ltd (CSR).

The force of the collision sent "the head of the train flying into the air," said Cai Qi, a 30-year-old villager who saw the accident and rescued five children, four women and one man. "Some of them had their hands or legs broken. Some were crushed inside debris and we pushed and carried them out."

"Suddenly, there was a loud bang," said 32-year-old survivor Yin Caohui. "After that, the train broke. It was all dark and we could not see anything."

A 31-year-old survivor, who gave his last name as Yu, said the train stopped suddenly and the lights immediately went off but the passengers "didn't think it was so serious."

"Only when we got down, we saw so many train carriages falling down," Yu said.

In 2008, an express train traveling from Beijing to the eastern coastal city of Qingdao derailed and collided with another train, killing 72 and injuring 416 people.

(Additional reporting by Aly Song in Wenzhou and Sally Huang and Sui-Lee Wee in Beijing; Writing by Sui-Lee Wee and Ben Blanchard)

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China, U.S. play down tensions at Asian security summit (Reuters)

NUSA DUA, Indonesia (Reuters) – The United States and China moved to repair strained ties on Friday, saying tensions over the South China Sea were easing with new conduct guidelines between Beijing and Southeast Asian nations.

Secretary of State Hillary Clinton and Chinese Foreign Minister Yang Jiechi, meeting at Asia's biggest security conference, appeared eager to ensure the dispute over the oil and gas-rich waters did not become another source of friction between the world's largest economy and the second-largest.

"I want to commend China and ASEAN for working so closely together to include implementation guidelines for the declaration of conduct in the South China Sea," Clinton said at the meeting on the Indonesian resort island of Bali.

Clinton will outline the U.S. position in more detail in an address on Saturday, saying Beijing and its Southeast Asian neighbors need to do more to cut tensions, boost communication and work out legal and operational details of their new deal.

But U.S. officials said China was clearly ready to tamp down tensions over the issue.

"China has come to this meeting with a clear determination that they want to ease anxieties," one senior U.S. official told reporters.

China acquiesced to the new guidelines on Thursday after almost a decade of deadlock, in what may have been an attempt to mollify ASEAN enough to take the topic off the table before Clinton's arrival. China, Taiwan, and four ASEAN members -- the Philippines, Malaysia, Brunei and Vietnam -- all claim territory in the South China Sea and Washington has irritated Beijing by declaring it also has a national interest at stake in ensuring freedom of navigation and trade.

China says it has had undisputable sovereignty over the South China Sea since ancient times, and is adamant about not involving other parties to help resolve the matter.

The U.S. official said Clinton's speech on Saturday would address some of these concerns, and advocate for a more straightforward legal process to resolve disputes.

China has accused the United States of triggering tension in the region by holding naval drills, and President Barack Obama's meeting with Tibetan spiritual leader the Dalai Lama last week has added further strains.

Foreign minister Yang, hosting Clinton for bilateral talks on the sidelines of the ASEAN security forum, said the South China Sea guidelines would "go a long way to maintaining peace and stability and good neighborliness in the region."

Diplomats said the guidelines were only a small, but important, step toward resolving one of the region's longest-standing disputes.

"If parties concerned abide by the guidelines, certainly tensions will be reduced," said a senior Asian diplomat.

"We have to engage with China so China takes the right course. China has to understand international rules and the South China Sea dispute is an important test case."

UNDERSTANDING SENSITIVITIES

Yang did not mention Obama's meeting with the Dalai Lama, regarded by Beijing as a violent separatist, but a Chinese spokesman indicated it could come up.

"We believe that it is important to respect the sovereignty and territorial integrity of China, and to respect China's major concerns on the issue of Tibet and some other sensitive issues," spokesman Liu Weimin told reporters.

"I sense the U.S. side understands the sensitivity of these issues and we both agreed to promote further dialogue."

The U.S. official said China was "solemn" in its discussion of the Dalai Lama issue, but held its fire.

"I've been in meetings before where some of the rhetoric can be carried away. It was polite and respectful from both sides," the official said, taking this as a signal from Beijing "to maintain forward momentum" in the relationship.

Yang focused on U.S.-Chinese cooperation on a range of issues including efforts to bring North Korea back into six-party negotiations on its nuclear program.

U.S. officials said Clinton's meeting in Bali with Yang marked the start of several months of high-profile diplomacy in the region that both sides want to succeed.

Both Obama and Chinese President Hu Jintao are due to attend a meeting of the APEC Asia economic forum in Honolulu later this year, and Obama will also attend November's East Asia Summit in Bali for the first time, giving him another chance to touch base with the Chinese leader.

Clinton will fly on Sunday from Bali to Hong Kong -- the first U.S. secretary of state to visit since 1997 when China resumed control of the city from Britain -- and will stop by the southern Chinese city of Shenzhen on Monday for a meeting with Chinese State Councilor Dai Bingguo.

Clinton is due to give a speech in Hong Kong on Monday that will emphasize the U.S. view of economic ties with China, which have been a serious source of tension in the past. (Additional reporting by Raju Gopalakrishnan; Editing by Raju Gopalakrishnan and Sugita Katyal)

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China quarterly growth tops forecast, boosts inflation fight (Reuters)

BEIJING (Reuters) – China's economy grew faster than expected in the second quarter, easing fears of a hard landing and strengthening Beijing's resolve to fight persistently high inflation.

China's statistics office said on Wednesday that stabilizing prices remained the top priority, even though a "complex and volatile" global economy posed a threat to growth, complicating the policy choices.

Second-quarter gross domestic product rose 9.5 percent from a year earlier, exceeding economists' forecasts for 9.4 percent growth, helped by solid domestic consumption and investment.

But that was still the slowest pace since the third quarter of 2009, when the world economy was pulling out of its worst recession in 80 years.

Some cooling was expected -- and even welcome -- because China has raised interest rates and clamped down on bank lending to try to ease inflation, which hit a three-year high in June. The stronger-than-expected GDP figures suggest Beijing may have more room to tighten without choking off growth.

"These are very good numbers," said Liu Li-Gang, an economist with ANZ in Hong Kong.

"This is perhaps the reason the (central bank) raised interest rates last week. They are showing they are not afraid of a significant slowdown in the economy."

For investors worried that Beijing's tightening campaign might exact too heavy a toll on the fastest-growing major economy in the world, the figures offered some reassurance. Industrial output in June was also stronger than expected, growing at its fastest pace in over a year.

Asian stocks, metals and the Australian dollar all rose.

China's GDP in April to June rose 2.2 percent from the first quarter on a seasonally adjusted basis, a slight pick-up in pace from 2.1 percent in the first quarter.

Chinese officials have struck a hawkish note in recent days, mindful of the risk that overheating inflation could stoke civil unrest.

Although many economists think overall inflation pressures will ease during the second half of the year, prices have soared for popular staples such as pork and it will take time for them to recede.

A small majority of analysts expect the central bank to raise interest rates again this year and most forecast further increases in bank reserve ratios, a Reuters poll last week showed.

Sheng Laiyun, a spokesperson for China's statistics bureau, said stabilizing inflation was the primary goal, and policies would be "targeted, flexible and effective," echoing recent remarks by Premier Wen Jiabao.

"It's not easy and China has done a great job to maintain fast economic growth when the global situation is complex and volatile," Sheng said.

Europe's sovereign debt troubles and a slowdown in the U.S. economy means two of China's best export customers are struggling. New export orders slipped in June, a manufacturing survey showed earlier in July, which raised questions about China's growth prospects.

But Wednesday's figures suggested domestic demand remains robust. Final consumption contributed 4.6 percentage points to first-half growth, while exports subtracted slightly, China's statistics bureau said.

Analysts say China's economy is on course for growth well above 9 percent this year, a rate that would be the equivalent of adding Switzerland's GDP to the $6 trillion economy.

Still, demand weakness in China's Western export markets may cause economic growth to slacken in the third quarter from the second, they say.

REBALANCING

Industrial output rose 15.1 percent in June from a year earlier, the strongest growth since May 2010. It also marked a sharp quickening from May's 13.3 percent and beat market expectations of 13.1 percent.

The growth figures underlined the resilience of the world's second-largest economy, thanks to the country's rapid urbanization, and could soothe investor concerns about an abrupt slowdown that would dent demand for global commodities.

"The data should also help to dispel the wilder fears of an economic collapse in China," said George Worthington, an economist with IFR, a Thomson Reuters unit.

Fixed-asset investment grew 25.6 percent in the first six months from a year earlier, while retail sales expanded 16.8 percent, showing that domestic demand still held up relatively well despite policy tightening.

"The economic growth data are quite upbeat and industrial production is noticeably stronger than expected," said Xu Biao, an economist with China Merchants Bank in Shenzhen. "It's quite beyond expectations as Chinese imports and (purchasing manager's survey) in June were quite weak."

Stronger demand at home not only helps insulate China from the global turmoil, it provides a bit of a buffer for the rest of the world and evidence that Beijing is making good on pledges to move away from export-driven growth. But it can also increase price pressures.

Fighting inflation remains Beijing's top priority but any policy steps should avoid causing big swings in economic growth, Premier Wen said in comments published on Tuesday.

He signaled in June that the country would struggle to meet its 4 percent average inflation target in 2011. Monthly consumer price figures show inflation averaged 5.4 percent in the first half of the year.

An academic adviser to the People's Bank of China was quoted by state television on Wednesday as saying the inflation rate may have peaked in June, when it hit 6.4 percent.

Li Daokui, a member of the central bank's monetary policy committee, said the full-year inflation rate could be around 4.8 percent.

Last Wednesday, China raised rates by 25 basis points -- the third such increase this year -- which took the one-year bank deposit rate to 3.5 percent.

The central bank has raised benchmark interest rates five times since October and lifted banks' reserve requirement ratio -- its preferred policy tool so far -- nine times.

(Additional reporting by Langi Chiang, Gui Qing Koh and Zhou Xin: Writing by Emily Kaiser: Editing by Neil Fullick)

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China raps U.S. over military drills in disputed seas (Reuters)

BEIJING (Reuters) – China's military sharply criticized the United States on Monday for holding military drills in contested waters of the South China Sea, a dispute Beijing has warned Washington not to meddle in.

Chen Bingde, People's Liberation Army Chief of the General Staff, said that if the United States really wanted peace in the South China Sea, then the timing of its recent military exercises in the region was poor.

"The U.S. has said many times that it does not intend to get involved in the South China Sea dispute, but ... is actually sending out the opposite signal," Chen told a joint news conference with the United States' top military officer, chairman of the Joint Chiefs of Staff Admiral Mike Mullen.

"Despite having conducted them in the past, holding these military drills at this moment is extremely inappropriate." China has been embroiled in a row with the Philippines and Vietnam in recent months over what each government sees as intrusions and illegitimate claims in the stretch of ocean spanning key shipping lanes and possibly rich in oil and gas.

Beijing has called for disputes to be resolved bilaterally, a strategy some critics have described as "divide and conquer.

Others, including the Philippines, have urged a multilateral approach, and Manila has staged naval drills with the U.S. in the region.

The Philippines' foreign secretary said he proposed to China that the dispute be resolved through U.N. arbitration on his visit to Beijing last week, but did not express confidence that China would agree.

China, the Philippines, Malaysia, Brunei, Vietnam and Taiwan all claim territory in the South China Sea. China's claim is the largest, forming a vast U-shape over most of the sea's 648,000 square miles (1.7 million square km), including the Spratly and Paracel archipelagos.

China-U.S. military-to-military relations have been rocky. China dislikes U.S. reconnaissance patrols near its coast and is suspicious of its bases in South Korea and Japan.

"America's global unmanned aircraft have conducted reconnaissance only 16 nautical miles from China's border. This is very, very close. I hope our American friends can adopt measures in this regard that will fully consider the feelings of the Chinese people," Chen said.

The U.S. for its part wants greater military transparency from China over its military modernization, and has warned about China's growing missile and cyber capabilities.

Self-ruled Taiwan, claimed by China as its sovereign territory, has been another major irritant. China severed military ties with the United States in early 2010, furious about $6.4 billion in U.S. arms sales to Taiwan.

Mullen later met with China's Defense Minister Liang Guanglie and Vice President Xi Jinping, who told the admiral he hoped Washington would stop selling weapons to Taiwan while calling for deeper trust, state news agency Xinhua reported.

"I hope the two countries' defense departments and armed forces will remove obstacles and promote their ties with mutual respect and mutually beneficial cooperation," Xi said.

Mullen's four-day trip to China comes as Washington and Beijing try to patch up relations between their two militaries.

But at the press conference with Chen, Mullen reiterated his earlier pledges that the U.S. would maintain its long-standing military presence in Asia and defended the military drills as inline with international law.

"These flights, these operations, these exercises are all conducted in accordance with international norms, and essentially we will continue to comply with that in the future," Mullen said.

(Additional reporting by Ben Blanchard; Editing by Yoko Nishikawa)

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U.S. caught China buying more debt than disclosed (Reuters)

NEW YORK (Reuters) – The rules of Treasury auctions may not sound like the stuff of high-stakes diplomacy. But a little-noticed 2009 change in how Washington sells its debt sheds new light on America's delicate balancing act with its biggest creditor, China.

When the Treasury Department revamped its rules for participating in government bond auctions two years ago, officials said they were simply modernizing outdated procedures.

The real reason for the change, a Reuters investigation has found, was more serious: The Treasury had concluded that China was buying much more in U.S. government debt than was being disclosed, potentially in violation of auction rules, and it wanted to bring those purchases into the open - all without ruffling feathers in Beijing.

Treasury officials then worked to keep the reason for the auction-rule change quiet, with the acting assistant Treasury secretary for financial markets instructing subordinates to not mention any specific creditor's role in the matter, according to an email seen by Reuters. Inquiries made at the time by the main trade organization for Treasury dealers elicited the explanation that the change was a "technical modernization," according to a document seen by Reuters. There was no mention of China.

The incident calls into question just how clear a handle the Treasury has had on who is buying U.S. debt. Chinese entities hold at least $1.115 trillion in U.S. government debt, and are thought to account for roughly 26 percent of the paper issued by Washington, according to U.S. government data released on June 15.

China's vast Treasury holdings are both a lifeline and a vulnerability for Washington - if the Chinese sold their Treasuries all at once, it could undermine U.S. markets and the economy by driving interest rates higher very quickly. Scenarios of this sort have been discussed in Washington defense-policy circles for at least a year now. Not knowing the full extent of these holdings would make it even more difficult to assess China's political leverage over U.S. finances.

The Treasury has long said that it has a diversified base of investors and isn't overly reliant on any single buyer to digest new U.S. Treasury issuance. Evidence that China was actually buying more than disclosed would cast doubt on those assurances.

THE 'GUARANTEED' BID

The United States sells its debt to investors through auctions that are held weekly - sometimes four times per week - by the Treasury's Bureau of the Public Debt, in batches ranging from $13 billion to $35 billion at a time. Investors can buy the bonds directly from the Treasury at auctions, or through any of the 20 elite "primary dealers," Wall Street firms authorized to bid on behalf of customers. The Treasury limits the amount any single bidder can purchase to 35 percent of a given auction. Anyone who bought more than 35 percent of a particular batch of Treasury securities at a single auction would have a controlling stake in that batch.

By the beginning of 2009, China, which uses multiple firms to buy U.S. Treasuries, was regularly doing deals that had the effect of hiding billions of dollars of purchases in each auction, according to interviews with traders at primary dealers and documents viewed by Reuters.

Using a method of purchases known as "guaranteed bidding," China was forging gentleman's agreements with primary dealers to purchase a certain amount of Treasury securities on offer at an auction without being reported as bidders in that auction, according to the people interviewed. After setting the amount of Treasuries the guaranteed bidder wanted to buy, the dealer would then buy that amount in the auction, technically on its own behalf.

To the government officials observing the auction, it would look like the dealer was buying the securities with the intent of adding them to its own balance sheet. This technicality does not preclude selling them later in the secondary market, but does influence the outcome of bidding in the auction, by obscuring the ultimate buyer. In fact, the dealer would simply pass the bonds on immediately to the anonymous, guaranteed bidder at the auction price, as soon as they were issued, according to the people interviewed.

The practice kept the true size of China's holdings hidden from U.S. view, according to Treasury dealers interviewed, and may have allowed China at times to buy controlling stakes - more than 35 percent - in some of the securities the Treasury issued.

The Treasury department, too, came to believe that China was breaching the 35 percent limit, according to internal documents viewed by Reuters, though the documents do not indicate whether the Treasury was able to verify definitively that this occurred.

Guaranteed bidding wasn't illegal, but breaking the 35 percent limit would be. The Uniform Offering Circular - a document governing Treasury auctions - says anyone who wins more than 35 percent of a single auction will have his purchase reduced to the 35 percent limit. Those caught breaking auction rules can be barred from future auctions, and may be referred to the Securities and Exchange Commission or the Justice Department.

The Treasury Department generally does not comment on specific investors but a source in the department said China was not the only Treasury buyer striking guaranteed bidding deals.

People familiar with the matter named Russia as being among the guaranteed bidders. But Russia's total Treasury holdings, while significant, represent 2.8 percent of outstanding U.S. debt, versus one-fourth for China's.

CHANGING THE RULE

Traders at primary dealers did not have the same diplomatic concerns about the level of Chinese buying. But they did have reasons to dislike guaranteed bidding, and they began clamoring for a change. One trader said in an interview he first brought the issue to the attention of Treasury officials in 2007.

Some primary dealers began expressing concern that the deals were opaque in a way akin to the Salomon Brothers Treasury trading scandal in the early 1990s. In that case, traders from the securities firm submitted false bids under other bidders' names in Treasury auctions in order to more closely control the results, and their bids altered the auction prices. The idea that unseen bidders were again influencing auction prices raised similar concerns among traders.

There were also commercial concerns: Dealers say that knowing that the practice was going on at other firms made them less confident they could see and understand overall patterns of buying in the Treasury market. Such visibility can be one of the greatest benefits of being a primary dealer, since the service itself often doesn't pull in big profits directly.

Some traders at primary dealers say they simply refused to do the deals and ended up turning away customers, including China. That irked sales colleagues who were promising clients guaranteed bidding deals.

At the beginning of 2009, Treasury officials began discussing the issue of guaranteed bidders, with a focus on China's behavior, internal documents seen by Reuters show. The culmination of their efforts was a change to the Uniform Offering Circular published on June 1, 2009 that eliminated the provision allowing guaranteed bidding.

Treasury Secretary Timothy Geithner was in Beijing that day meeting with Chinese government officials on his first formal visit to China since taking up his cabinet post. There is no evidence he discussed the rule change with Chinese officials there.

A spokeswoman for the Treasury Department said: "We regularly review and update our auction rules to ensure the continued integrity of the auction process. The auction change made in June 2009 eliminated some ambiguity in auction rules and increased transparency, which ultimately benefits taxpayers and investors."

The rule change had an immediate impact.

In the first auctions conducted after guaranteed bidding was banned, a key metric rose sharply: the percentage of so-called indirect bidders, those who placed their auction bids through primary dealers. Indirect bidders are seen as a proxy measure for foreign central bank buying, because foreign central banks most often bid through primary dealers. With the elimination of the guaranteed bidder provision, far more buyers were put in this class in reports to the Treasury Department.

The seven-year U.S. Treasury note, which was sold in sizes of between $22 billion and $28 billion once a month from February 2009 to September 2009, had an average indirect bid percentage of 33 percent from February through May. But from June to September the average indirect bid rose to 63 percent.

(Graphic: http://r.reuters.com/hyn42s)

BIDDERS REACT

Shortly after the Treasury revised the auction rules, U.S. officials learned from dealers that some bidders were seeking to continue using guaranteed bids. According to a Treasury document, a large client asked one primary dealer whether the Treasury might make an exception to the new rule for them. Neither the client nor the dealer were named.

Deutsche Bank, Goldman Sachs, JPMorgan, RBS Securities and UBS all received calls from clients asking for secret bid arrangements immediately after the rule change went into effect, according to the internal Treasury document, a summary of inquiries received seeking guidance from dealers after the rule change.

Deutsche Bank, according to the document, said their client canceled a bidding deal. Goldman told Treasury that a large client would be going to other dealers who in the past had done the deals after Goldman turned them away, the document said.

JPMorgan asked if there were any exceptions to the new prohibition on guaranteed bids. RBS said it actually struck a deal with a customer for a guaranteed bid after the rule change, but it used a different structure and wanted to know what was legal. UBS told the New York Fed that its former guaranteed-bidder client would now change its behavior and buy Treasuries in the secondary market directly after an auction, according to the document.

Spokespeople for Goldman Sachs and UBS declined to comment for this story. Deutsche Bank, RBS, and JPMorgan did not respond to requests for comment.

The change came at a delicate time in U.S.-Chinese financial relations. China, long a major buyer of American government securities, was at the time snapping up huge amounts of debt as Washington was suffering a sharp drop in tax revenue during a crushing recession.

Almost all of the business of buying Treasuries on behalf of the Chinese government is conducted by China's State Administration of Foreign Exchange (SAFE), an arm of the Chinese central bank which manages China's currency reserves, which include large amounts of U.S. Treasury bonds.

SAFE, for its part, was facing heat in China over the extent of its U.S. holdings. SAFE was hit hard by the collapse of Lehman Brothers, the doomed investment bank that was SAFE's trading counterparty in the U.S. overnight-lending market. And the potential losses SAFE faced upon the collapse of the U.S.-backed mortgage titans Fannie Mae and Freddie Mac whipped up such a storm in China that Chinese officials publicly berated the Americans for lapses in financial stewardship. (For more, click on http://link.reuters.com/qec28r )

SAFE officials in Beijing did not respond to a request for comment.

After evidence mounted that China was disconcerted by the auction-rule change, U.S. officials moved to tweak the system, to offset some of the pinch of the stricter bidding rules. The move gave big buyers a way to maintain some anonymity, by increasing the amount of securities it was possible to buy at a single auction without having to declare the purchase in a letter to the New York Fed.

The old requirement stipulated that any purchase of $750 million in Treasury securities had to be declared by the buyer in a letter to the New York Fed. Officials increased the threshold to $2 billion.

'TECHNICAL MODERNIZATION'

The official explanation for eliminating guaranteed bidders did not mention foreign central banks at all. It focused instead on "technical modernization" of auction rules.

One government official warned others in a written message "not to include the words 'China' or 'SAFE' in email subjects." The Securities Industry and Financial Markets Association, the main trade organization for Treasury dealers, asked the Treasury in early June 2009 to explain the change. The Treasury's response: It had found that a detail in its auction rules no longer applied to the way auctions were conducted, and so the rule was changed, according to an internal Treasury memo.

Separately, the Treasury's acting assistant secretary for financial markets, Karthik Ramanathan, told subordinates in an email: "Please let's stick to the 'Modernization of Auction Rules' when outside requests come in on the (rule) change. Please DO NOT emphasize the guaranteed bid portion, or mention any specific investors."

Ramanathan, who left the Treasury in March of 2010 and is now senior vice president and director of bonds at Fidelity Investments in Merrimack, New Hampshire, declined to comment.

The Federal Reserve Bank of New York, which interacts directly with primary dealers on Treasury auctions, issued a strongly worded letter on June 23, 2009, dealers say, urging them to "comply with the spirit as well as the letter of this recent auction rule clarification."

"That was how we knew they wanted us to tell them who was buying what," said a trader at one primary dealer.

(Additional reporting by Kristina Cooke and Benjamin Kang Lim; Editing by Michael Williams and Claudia Parsons)

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China releases human rights activist Hu Jia (AFP)

BEIJING (AFP) – One of China's most prominent prisoners of conscience, Hu Jia, returned home Sunday after completing a jail term for subversion but looked likely to be muzzled along with other top dissidents.

The human rights activist's release after more than three years in prison comes after outspoken artist Ai Weiwei emerged in Beijing last week from nearly three months in police custody amid a government crackdown on dissent.

Hu is widely expected to be hit with the same strict curbs as those applied to Ai and a range of other activists and rights lawyers, who have apparently been ordered to keep quiet to gain their freedom.

Hu returned to his home outside Beijing early Sunday morning, his wife and fellow activist Zeng Jinyan said on Twitter.

"On a sleepless night, Hu Jia arrived home at 2:30 am. Peaceful, very happy. Need to rest for a while. Thanks to you all," she said.

Hu, 37, was jailed on subversion charges in April 2008 just ahead of the Beijing Olympics after angering the ruling Communist Party through his years of bold campaigning for civil rights, the environment and AIDS sufferers.

Ai's detention had sparked an international outcry and his recent release has been widely seen as an attempt by China to defuse criticism during a visit by Premier Wen Jiabao to Europe now under way.

Hu's release at the end of his prison term, however, was long expected.

Aside from his jail sentence, Hu also faces one year of "deprivation of political rights" -- essentially a ban on political activities -- and Zeng has indicated he would be making no public statements.

"During this time, he must treat his cirrhosis and take care of his family," she said on Twitter last week.

Hu suffers from cirrhosis of the liver and Zeng has said the ailment has worsened during his time in jail, blaming the prison for providing inadequate medical care.

Hu and Zeng have a young daughter.

It was not immediately clear exactly what sort of restrictions Hu may face.

Attempts to reach Zeng by telephone at the couple's home were unsuccessful and Chinese security personnel prevented AFP journalists from reaching their apartment on Sunday.

EU foreign affairs chief Catherine Ashton welcomed Hu's release, but her spokesman stressed the bloc's demands that Beijing ensure full freedoms are respected.

"Obviously we welcome the fact Hu has been released," said Ashton's spokesman, Michael Mann. "But it is important to keep an eye on how he is treated from here on in. We hope Hu is given full rights," he told AFP.

Hu began his activism by highlighting discrimination against Chinese HIV/AIDS sufferers and environmental degradation, but later spoke out on behalf of a wide range of victims of government abuses.

As a result, he and Zeng have suffered repeated detention or lengthy periods of house arrest that they have criticised as unlawful.

They made a short documentary, available on the Internet, detailing one of these detentions from 2006-2007 called "Prisoners of Freedom City".

Regularly tipped as a potential candidate for the Nobel Peace Prize, Hu has won overseas human rights awards from bodies such as the European Parliament.

"China has been a dictatorship throughout its entire history," Hu told AFP in a 2007 interview.

"Now... I believe that we have a chance to bring democracy to this country for the first time in 5,000 years."

He was taken into custody in December 2007 amid a previous crackdown on government critics ahead of the Beijing Olympics and convicted on subversion charges.

Rights groups have accused China's ruling Communist Party of abusing such charges as a way of silencing government critics.

Zeng said police told her Hu was not likely to enjoy a "normal" life after his release, remarks she interpreted to mean he would be confined to his home like some other recently released dissidents.

New York-based activist group Human Rights Watch on Friday also urged the Chinese government not to subject Hu and his family to "house arrest or other extrajudicial deprivations of liberty".

The government launched a major crackdown on dissent in February in an apparent bid to squelch any possible Chinese version of the "Arab Spring" uprisings in the Middle East.

Normally outspoken detainees such as Ai have uncharacteristically refused public comment after their release.

Activists say this indicates a systematic new government strategy to silence dissenters, possibly through threats against them or their families.

The rights group Chinese Human Rights Defenders has said 49 people have been detained on suspicion of criminal acts in the ongoing crackdown, most of whom have either been formally arrested, sent to re-education camps, or released on bail awaiting trial.

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China to remain long-term investor in Europe's debt (Reuters)

BUDAPEST (Reuters) – Chinese Premier Wen Jiabao said on Saturday he was "still confident" that Europe can overcome the debt crisis and said China would remain a long-term investor in Europe's debt market.

The Chinese Premier spoke at a press conference with Hungarian Prime Minister Viktor Orban during a visit to Hungary.

"I have confidence in European economic development," he said. "China is a long-term investor in Europe's sovereign debt market. In recent years we have increased by a quite big margin holdings of euro bonds."

"In the future, as we have done in the past, we will support Europe and the euro," Wen added.

He said China stood willing to help Europe "work for expeditious recovery and stable growth," but did not give exact figures on how much euro zone sovereign debt China might buy.

Wen also said China was willing to buy a "certain amount" of Hungarian government bonds and aims to boost bilateral trade to $20 billion by 2015. He did not specify the amount of Hungarian bonds China would be willing to purchase either.

He said China's state development bank would provide 1 billion euros for development projects between Hungary and China.

The Chinese premier is visiting Europe as the euro zone grapples to contain Greece's worsening debt crisis and possible default which analysts fear could roil global markets and trigger another financial crisis.

China has large holdings of euro-denominated assets in its vast $3.05 trillion foreign reserves and is desperate to do what it can to preserve the value of its holdings, though analysts say the extent to which China may commit fresh funds toward purchasing distressed European debt as a market-calming gesture, will likely be limited.

Wen Jiabao, the first Chinese head of government to visit Hungary for 24 years, is also seeking to explore greater trade ties with the country given its strategic location and increasing role as a logistics and trade processing hub in Eastern Europe for Chinese goods.

Hungarian Prime Minister Viktor Orban said China's buying of Hungarian government bonds would increase the security of debt financing for Hungary in the medium term.

"The purchase of government bonds is also important for Hungary as Hungary is able to finance itself from markets but the fact that China will buy further will bring huge security," Orban said.

While Wen is expected to face a barrage of protests and criticism from governments in Britain and Germany over China's human rights record and its recent clampdown on dissent, the release of prominent activist and artist Ai Weiwei on the eve of Wen's visit could ease some pressure on this front.

The 54-year-old artist Ai was freed on bail on Wednesday, while a batch of Ai's associates and other activists have also been freed since then, marking a climbdown of sorts by Chinese authorities, who have rarely flinched in prosecuting critics of Party rule.

The 27-member EU bloc is now China's largest trading partner with bilateral trade worth nearly 400 billion euros ($573 billion).

(Writing by Krisztina Than and James Pomfret; Editing by Toby Chopra)

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China blurs A380 order, backs 747 amid EU row (Reuters)

LE BOURGET, France (Reuters) – China downgraded the announcement of an Airbus superjumbo order and signed up for the Boeing 747-8 as deals worth $9 billion coincided with a row over European emissions trading rules, industry sources said.

The deals both involved parts of the HNA airlines group and had been planned before the Paris Air Show, they said, but the decision not to announce the names of the buyers triggered one of the mysteries of this week's event.

Industry sources said plans to announce a high-profile $3.8 billion deal between Airbus and Hong Kong Airlines for 10 A380 superjumbos were called off on Thursday because of China's anger over European plans to charge airlines for emissions.

China threatened last month to hold back on purchasing Airbus aircraft because of the EU emissions trading scheme, which airlines body IATA has called illegal.

Additionally, industry sources said a company affiliated to the same carrier, Hainan Airlines, was behind the unexpected announcement of an anonymous deal at Boeing this week.

Boeing said an unidentified airline had provisionally committed to 15 747-8 passenger jets worth $4.8 billion.

Airlines often choose to buy jetliners without identifying themselves to their competition, but such announcements are rarely made at air shows which are designed for publicity. Boeing also rarely announces deals before they are confirmed.

Airbus and Boeing declined to comment and representatives of the HNA Group were not available.

Hong Kong Airlines is 46 percent owned by HNA Group, the parent of Hainan Airlines Co Ltd.

TEMPTING TARGET

Airbus and Boeing both brought their largest passenger jets to the show, a biennial event which rotates with the Farnborough Air Show in Britain.

The 747-8 with 467 seats is Boeing's first stretched version of the 747 and is in the midst of flight testing. It will enter service initially as a freighter, then in a passenger version.

The 525-seat A380 is the world's largest airliner and Europe's most high-profile aircraft since Concorde, making it a tempting target in any political tensions affecting aerospace.

The Airbus deal has not itself been blocked and is in the manufacturer's order book, but the decision to cancel a signing ceremony is a clear protest signal, the industry sources said.

Aircraft purchases also need Chinese government approval.

The 747-8 purchase followed competition between Airbus and Boeing for the Hong Kong Airlines order.

While advancing development of its own smaller airplane, China tends to balance orders between the two foreign suppliers.

From Jan 1 next year, the EU will require all airlines flying to Europe to be included in the Emissions Trading Scheme (ETS), a system that compels polluters to buy permits for each tonne of carbon dioxide they emit above a certain cap.

China's top aviation industry body ramped up pressure on the European Union earlier this month, saying it would give full support to legal action against the forced entry of airlines into the EU's carbon trading scheme. [ID:nL3E7H60D5]

China says the scheme is unfair for developing countries and costly.

(Additional reporting by Matthias Blamont; Editing by Jon Loades-Carter)

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