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Portfolio > Economy & Markets

China Berates U.S. Over Downgrade

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In a scathing Saturday editorial excoriating the U.S. for being addicted to debt and living beyond its means, China’s state-run news agency highlighted a different but related issue: China’s U.S. debt holdings that amount to some $1.16 trillion. If U.S. Treasuries are worth less in the wake of the country’s downgrade, then China has a problem of its own.

The Washington Post reported that China’s editorial roundly scolded the U.S. for “squander[ing] unlimited overseas borrowing,” and said those days were at an end. Beijing had said nothing in the days leading up to the budget agreement when downgrades were threatened. Now that it has become a reality, and the potential threat to its own investments has become more immediate, the country’s leaders have become openly critical of the U.S.

China’s own ratings agency, Dagong Global Credit Rating Co., had already cut the U.S. rating for the second time three days before. Its first cut was administered in November, although little attention was paid to it at the time.

According to a Reuters report, China’s anger over the U.S. debt situation masks its own economic situation, which is so heavily tied to exports that it maintains a constant influx of foreign currencies and their attendant risks.

Beijing is apparently concerned that its economic policies are moving too slowly to keep up with the global economic situation—both in foreign currency risk and in falling demand for exports as other countries continue to tighten their belts in austerity. Officials have said off the record that China must change its policies in order to lower its trade imbalance and stock of foreign currency reserves.

While one step it is taking is to reduce restrictions on foreign investment, that has little effect on its enormous reserves. On Friday, Yu Yongding, a former central bank adviser, had called for a float of the yuan, as reported by AdvisorOne. While it is doubtful that China will permit that any time soon, the fact that such a step was called for in public, says the report, indicates that the country is ready for more drastic change than it has previously allowed.


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