China roundly condemned the US for its “debt addiction” and “short-sighted” political wrangling and said the world needed a new stable global reserve currency.
In a harshly worded commentary by the Xinhua news agency yesterday, China gave its first official comments on the US losing its gilded “AAA” long-term credit rating from Standard & Poor’s.
“China, the largest creditor of the world’s sole superpower, has every right now to demand the United States address its structural debt problems and ensure the safety of China’s dollar assets,” Xinhua said.
China also urged the US to apply “common sense” to “cure its addiction to debts” by cutting military and social welfare expenditure.
“The US government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone,” Xinhua wrote.
China also said further credit downgrades would very likely undermine the world economic recovery and trigger fresh rounds of financial turmoil.
“International supervision over the issue of US dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country,” Xinhua said.
Chinese economists said the US credit rating downgrade posed a great risk to financial markets and they expected it to prompt China, the world’s biggest holder of US Treasuries, to accelerate the diversification of its holdings.
S&P cut the US’ rating to “AA-plus” on concerns over the government’s budget deficits and rising debt burden. The move is likely to raise borrowing costs eventually for the US government, companies and consumers.
“There would be chaos in international financial markets at least in the short term. The most direct impact for China would be the hit on its reserves. The value of China’s dollar investments will fall and the shrinking effect may be great,” said Li Jie (李傑), a director at the Reserves Research Institute at the Central University of Finance and Economics.
Earlier this week, China had urged Washington to act responsibly to deal with its debt issues, saying uncertainty in the US Treasuries market would undermine the global monetary system and hamper global growth.
Beijing has repeatedly urged Washington to protect its US dollar investments, estimated by analysts to account for about two-thirds of its US$3.2 trillion in foreign exchange reserves, the world’s largest.
“China will be forced to consider other investments for its reserves. US Treasuries aren’t as safe anymore. There is a class of assets out there that are more risky than ‘AAA,’ but less risky than ‘AA+.’ China didn’t consider these investments before, but now it would be forced to do so,” Li said.
Earlier this week, the US narrowly avoided a default after lawmakers from across the political divide came together to hammer out a deal that would raise the country’s borrowing authority -after weeks of rancorous partisan battles.
S&P’s downgrade may also push the US to ease monetary policy further, causing even more uncertainty in global markets, said Ding Yifan (丁一凡), a deputy director at the Development Research Center, a think tank under the Chinese State Council.
“I think the chance of the United States launching another round of quantitative easing is rising, as outside investors may try to avoid dollar assets, leaving the Fed with no choice but to buy their own Treasuries,” Ding said. “If the United States really introduces QE3, it will definitely add more uncertainties to the global economy and could push up the prices of global commodities.”