State media in China, the largest holder of US debt, chided the US yesterday over a deal to raise its borrowing limit, saying it was hiding “risks and troubles” for the world economy.
The US House of Representatives late on Monday approved a package that would slash spending in return for raising the legal limit on US sovereign debt, in a bid to avoid a catastrophic default.
“Although the United States has basically avoided default, its sovereign debt problems remain unresolved,” a comment piece said in the People’s Daily, a mouthpiece of the Chinese Communist Party. “They are just deferred and there is a tendency for them to grow. This is casting a shadow over the recovery of the US economy and hiding even bigger risks and troubles for the global economy.”
China, sitting on the world’s biggest foreign exchange reserves of about US$3.2 trillion at the end of June, is the largest holder of US Treasuries.
The debate over the debt ceiling, which the newspaper labeled a “political fight,” would hurt the credibility of US Treasuries, though a default was “essentially unlikely,” it said.
The last-minute deal revealed the long-term risks to China’s massive holdings of US Treasuries, a separate article said in the overseas edition of the People’s Daily.
“It is necessary to change the current concentration on US dollar assets, but what is more important is to change the trend of increasing holdings of dollar assets in future,” Li Xiangyang (李祥陽), a researcher at the official Chinese Academy of Social Sciences, wrote in the article. “This requires a fundamental adjustment in the economic growth model.”
The Xinhua news agency chimed in by saying the US remained a “debt economy” and the long-term risks of a default still existed.
The US is very likely to let the US dollar depreciate to pass off the debt to its creditors, which may cause more flows of speculative funds, or hot money, into emerging economies like China and push up inflation, it said.
“If the US chooses to repudiate debt in this hidden manner, it will seriously impact the stable growth of the global economy,” said Xinhua, which last week urged the US to “live within one’s means.”
State television also criticized the agreement in a rare editorial broadcast on the national evening bulletin on Monday, saying it had more “pomp and ceremony than substance.”
“The American taxpayer and global debt holders suddenly finds out that the debt crisis is only a tool ... that the main concern is to get more political capital for the next presidential election,” China Central Television said.