ANALYSIS: Is China rising? Or just keeping an eye on its money?

By Niels C Sorrells Aug 6, 2011, 12:17 GMT

Berlin - Neither a borrower nor a lender be. How true, how true Shakespeare's words are when it comes to current relations between the United States and China.

China's rebuke of the United States for lettings its debt mountain grow might have come as a shock to the US which only a decade ago would have never considered China an equal partner, much less a source for financial advice.

But China's move could be provoked by necessity as much as anything else.

Late Friday, the rating agency Standard & Poor's took the historic decision of downgrading the US debt from AAA - a rating unchanged since 1941 - to a slightly tarnished ranking of AA+ with negative outlook.

While being a major lender to the US certainly gives China a strong voice, its investments are on the line. If the unthinkable were to happen and the United States were to default on its debt, that would mean significant amounts of Chinese capital going up in smoke.

'The problem for China, at the moment, is there are few places for it to go,' noted Bates Gill, director of the Stockholm International Peace Research Institute and a scholar on China issues.

Even before the downgrading, US debt jitters had left markets on edge for most of the summer.

Tuesday's last-minute resolution of negotiations on raising the US debt ceiling did little to calm nerves, especially since it seemed to do so little toward reining in the 14.6-trillion-dollar debt mountain weighing down the United States.

And then China - which has lent the United States more than 1 trillion dollars in the form of bonds - stepped in, issuing a statement through the Xinhua news agency saying it now expects Washington to gets its fiscal house in order.

Noting that it 'has every right now to demand the United States address its structural debt problems and ensure the safety of China's dollar assets,' it slammed the USfor its 'gigantic military expenditure and bloated social welfare costs.'

But are the Chinese showing nerve or nervousness?

'For China to engage in such very public and high-level finger-wagging is unusual on almost any issue. It is a sign of both its deep concern and its more emboldened sense of confidence on the world stage,' said Gill.

That puts the United States in an awkward position. Ever since the collapse of the Soviet Union, the US has been the world's de facto superpower, dispensing advice on everything from finance to defence matters to good governance.

But, after having only tentatively emerged from a global financial crisis most say it was responsible for three years ago, and following Friday's downgrade fiasco, Washington is now suffering from a serious credibility crisis.

In the meantime, China has continued to breeze through the financial crisis, recording strong growth while its companies swoop down to rescue a score of distressed Western businesses.

That has already boosted China's international standing, with European leaders flocking to China - not the US - for pledges of support to back the euro as Europe undergoes its own financial crisis.

It's also meant that developing nations have at least given equal hearing to China as it touts its political/economic system, based on limited central planning and trade-offs in democratic freedoms for enhanced stability.

That's a stark difference to the post-Cold War period, when no one wanted to hear about planned economies and the Washington Consensus of democracy and free markets seemed to be the only game in town.

In a comment published by the Financial Times, Mohamed El-Erian, the head of the investment company PIMCO, says the US downgrading is 'an unambiguous and loud signal of the country's eroding economic strength and global standing.'

For US politicians, 'it renders urgent the need to regain the initiative through better economic policymaking and more coherent governance,' El-Erian wrote.

Others note that it could also mean the US signing on to proposals by the Group of 20 countries to rein in the ability of the ratings agencies to set market terms, an idea that has been embraced by European leaders like Nicolas Sarkozy.

The French president still blames the agencies for their role in the 2007-08 financial crisis.

Whichever way it goes, China will be watching, ready to comment ... and expecting its money back.

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