China called on the United States to “cure its addiction to debts” and “learn to live within its means” in a searing commentary published Saturday by the official New China News Agency in response to Standard & Poor’s historic downgrading of the U.S. government’s credit rating a day earlier.
China, the largest foreign holder of U.S. federal debt, blamed “shortsighted political wrangling in Washington” for creating the financial morass that threatens to undermine the global economy.
“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,” the commentary said.
“If no substantial cuts were made to the U.S. gigantic military expenditure and bloated social welfare costs, the downgrade would prove to be only a prelude to more devastating credit rating cuts, which will further roil the global financial markets all along the way,” it continued.
The Chinese government has regularly voiced concern about its dollar investments, most recently Wednesday when the governor of the country’s central bank urged the U.S. to avoid a default and cut its deficit.
In addition to holding about $1.2 trillion in treasuries, China has $3.2 trillion in foreign exchange reserves, about two-thirds of which are estimated to be in dollars.
Standard & Poor’s first-ever downgrading of U.S. debt echoed downgrades issued by a little-known Chinese credit rating agency that had been dismissed by some China watchers as politically motivated.
The Dagong Global Credit Rating Co. has twice lowered its rating for the U.S., most recently Wednesday when it said defects in Washington’s political structure stood in the way of solving the country’s debt problems.
“Dagong Global, a fledgling Chinese rating agency, degraded the U.S. Treasury bonds late last year, yet its move was met then with a sense of arrogance and cynicism from some Western commentators” the New China News Agency’s Saturday editorial said. “Now S&P has proved what its Chinese counterpart has done is nothing but telling the global investors the ugly truth.”
Jin Canrong, dean of international relations at Beijing’s People’s University, said China is especially fearful of another global recession because leaders have exhausted stimulus measures to blunt the effects of the 2008 financial crisis.
“A second recession would be a nightmare for China,” Jin said.
Massive credit expansion since 2008 has led to the country’s highest rate of inflation in three years, fueling a national property bubble and potentially sowing the seeds of social instability.
China’s outsized exposure to U.S. debt and the dollar is largely self-induced because of its decision to control its currency to keep its exports competitively cheap. To keep the value of the yuan low, it buys U.S. dollars, giving it substantial greenback holdings.
China’s massive trade imbalance with the U.S. has also left it with enormous dollar reserves. Since it has to do something with all those dollars, China has invested heavily in U.S. Treasury securities, which are still considered the safest and most liquid investments in the world.
Chinese officials have periodically pledged to diversify, but there are few good alternatives.