Chinese start to worry about US debt crisis

By Andreas Landwehr Jul 14, 2011, 12:47 GMT

Beijing - As the largest creditor of the US, China has become deeply worried about the American debt crisis. No other country has purchased so many US Treasury securities as China.

By official US Treasury figures, China - now the world's second-biggest economy - holds a dizzying 1.152 trillion dollars' worth of US security bills.

And so it is no wonder that Beijing finds itself holding its breath as it watches President Barack Obama do battle with leaders of Congress on raising the US debt ceiling.

Beijing's economic strategists can well imagine what the repercussions of a US default would be. China already is seriously worried about a new round of borrowing by the US, something which would put further downward pressure on the dollar and thereby make raw materials more expensive for China.

And in any even the weak growth being shown by the US economy - the world's largest and the most important export market for China - is a matter of deep concern.

The US economy was 'doing worse than expected' says Yu Bin, from the State Council Development Research Centre, and calling America's prospects 'worrying.'

Amid the ongoing debt ceiling drama going on in Washington, he said, China as the biggest creditor must 'seriously reconsider the threatened risks.'

In the short-term, China can only counter the dangers by re-shuffling its currency reserves, which are chiefly held in US dollars.

A few days ago, Beijing reported that as of June, its reserves had reached nearly 3.2 trillion dollars - 30 per cent more than a year earlier.

Over the long term, China must try to slow down this growth, Yu Bin says. For this to take place, Chinese companies must invest more abroad - or else China should import more and export less in order to start reducing its trade surpluses.

'We hope the US government adopts responsible policy and measures to ensure the interests of investors,' Foreign Ministry spokesman Hong Lei said, almost in a pleading tone.

So far, China has not said anything further for the record. But the leading Chinese ratings agency Dagong has, issuing a devastating assessment of US creditworthiness.

Even should the White House and Congress achieve a breakthrough, the agency sees the US credit standing as being seriously damaged. While American agencies have continued to give the US triple-A (AAA) status, Dagong last November issued an 'AA' rating, and has now reduced this to 'A' status.

A further reduction of the US credit rating was now 'only a matter of time and extent,' Dagong boss Guan Jianzhong commented.

His experts, in a new report made available to the German Press Agency dpa, predict a 'likely slowing of US economic growth for the next two years.'

The US is in the predicament of having to take on more debt in order to pay off old debts. This would be more difficult considering doubts about America's financial situation.

'The raising of debt dependence, high demand for funding and worries about the US financial and economic situation will threaten its ability to raise funds,' the Dagong experts said.

They warned that 'the possibility of repeating the 2008 financial crisis is rising.'

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