China tells U.S. to end its ‘addiction to debts’

August 6, 2011

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 by 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 appear 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.”

In Europe on Saturday, leaders reacted to the news of a downgrade with urgency. Financial officials from the Group of Seven industrialized nations planned a conference call for Sunday to discuss how to coordinate action among their countries’ central banks, a person familiar with the matter said.

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 Friday’s rating downgrade, 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.

China’s criticism was countered by Japan, the second-largest foreign holder of U.S. bonds, which sought to ease fears over the 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 strong yen, 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 up to the level where it stood in the middle of last week, roughly 77 against the dollar.

The Xinhua editorial came three days after a fledgling Chinese credit rating agency, Dagong Global Credit Rating Co., also said it had cut its rating of U.S. credit, from A+ to A with a negative outlook, because of the move in Washington to increase the country’s debt ceiling. It was Dagong Global’s second downgrade of U.S. credit, the first coming last November. The ratings by Dagong Global, founded in 1994 to rate Chinese companies, have had little notice outside China and are not recognized by the U.S. Securities and Exchange Commission.

The editorial 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 also said 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.”

Correspondent Chico Harlan in Tokyo and researcher Liu Liu in Beijing and the Associated Press contributed to this report.

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