By Keith B. Richburg, Published: August 6
BEIJING — In a blistering editorial Saturday by the state-run news agency, China said the downgrade of the U.S. credit rating by Standard & Poor’s showed the need for America to “cure its addiction to debts” and to “reestablish the common sense principle that one should live within its means.”
With its stockpile of at least $1.16 trillion in U.S. Treasury securities — and likely more amassed through entities overseas — China is the largest foreign holder of American debt, putting Beijing in a position to lecture Washington to get its fiscal house in order, according to the editorial in Xinhua, the official government news agency.
“China, the largest creditor of the world’s sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets,” Xinhua said. The news agency typically reflects the view of China’s collective top Communist Party leadership and sets the editorial line for the rest of the state-controlled media to follow.
“The days when the debt-ridden Uncle Sam could leisurely squander unlimited overseas borrowing appeared to be numbered,” the editorial said. “The U.S. 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.”
China — through its officially controlled media — largely kept silent during the weeks-long debt debate impasse in Washington between the White House and congressional Republicans. But the ratings downgrade Friday by Standard & Poor’s, which could very likely affect the value of China’s Treasury securities holdings, seems to have prompted China’s leaders to take a more outspoken, and critical, stance.
The editorial comes three days after a fledgling Chinese credit rating agency, Dagong Global Credit Rating Co., also said it had cut the U.S. credit rating from A+ to A with a negative outlook, due to the move in Washington to increase the country’s debt ceiling. Dagong Global had previously downgraded the U.S. credit rating, last November, due to the U.S. Federal Reserve’s loose money policy.
The statements by Dagong Global, founded in 1994 to rate Chinese companies, have had little notice or impact outside China because its ratings are not recognized by the U.S. Securities and Exchange Commission.
The Xinhua editorial Saturday said Dagong Global’s initial downgrade last year “was met then with a sense of arrogance and cynicism from some Western commentators.” But now the Standard & Poor’s downgrade, Xinhua said, “has proved what its Chinese counterpart has done is nothing but telling the global investors the ugly truth.”
The editorial went on to say that the fiscal problems in the United States should begin the discussion over introducing a new global reserve currency to replace the U.S. dollar.
Economists interviewed here said the financial crises roiling the United States and Europe would only accelerate the shift already underway in China — begun with the 2008 global recession — to rely less on exports and move toward an economy driven by domestic demand.
“The economic downturn in the U.S. and Europe is likely to weaken China’s exports and may cause more hot money influx,” said Guo Tianyong, a professor with the Central University of Finance and Banking. “China is determined to slow down its economy and focus more on boosting domestic demand, and I think to a certain degree China can bear a more weakened external demand.”
The economists also said the biggest fear here now was that the Federal Reserve might embark on a new round of quantitative easing, buying its own Treasury securities and driving up commodity prices.
“At this point, China is concerned about how the U.S. will draft its fiscal policy, whether the U.S. will continue quantitative easing and to what degree,” said Liu Yuanchun, vice president of the economics school at Renmin University, “because it will put more pressure on the Chinese government to prevent the inflow of hot money and keep the economic bubble stable.”
China’s criticism was countered by Japan, the second-largest foreign holder of U.S. bonds, which on Saturday sought to ease fears over the American rating downgrade.
“The trust we have in U.S. Treasuries and their attractiveness as an investment will not change because of this action,” one senior government official told Dow Jones.
But the downgrade also raised concerns that confidence in the dollar could further erode, drawing more investors to the yen. For months Japanese business leaders and government officials have worried about the yen’s strength, which they say does not reflect the overall health of the economy. If the yen continues to appreciate, Japan could be forced to once again intervene in the foreign currency market, as it did last Thursday, when the finance ministry sold roughly 4.5 trillion yen, briefly lowering its value to 80 against the dollar.
On Friday, the yen again strengthened slightly, negating the effectiveness of the intervention. Japan now fears that the S&P downgrade could drive the yen back to the level where it stood in the middle of last week, roughly 77 against the dollar.
The news of the U.S. downgrade forced other countries to discuss what actions they should take in advance of the markets opening on Monday. In South Korea, finance ministry officials held an emergency meeting to debate strategy, according to news reports in Seoul.
“There is possibility that South Korea’s economy might be affected in the short term,” Vice Finance Minister Yim Jong-yong said in a statement. “However, there is no need to be concerned excessively about our economy and financial markets.”
At a business gathering in New Delhi, India’s Finance Minister Pranab Mukherjee said: “Our growth story is intact and fundamentals are strong. Our markets have the capacity to withstand the negative sentiments affecting the external world.
“These sentiments in the developed nations affected our markets last Friday. But we witnessed some recovery already and this is testimony to our capacity for resilience.”
Correspondents Chico Harlan in Tokyo and Rama Lakshmi in New Delhi, and researcher Liu Liu in Beijing contributed to this report.
China tells U.S. to end its ‘addiction to debts’ - The Washington Post