Last week, credit ratings agency Standard and Poor’s (S&P) downgraded U.S. debt from a stellar AAA rating by a notch to AA+. The move sent financial markets in panic mode as investors grappled and tried to comprehend the severity and extent of the United States’ ability to finance its bills.
Similarly, China, who holds a massive amount of U.S. Treasuries, wasted no time in letting known their impatience and displeasure. China’s state-run agency, Xinhua, took Washington to task, criticising its “addiction to debts” and inability to “live within its means”. Meanwhile, the People’s Daily lambasted the level of American public debt as “irresponsible” and “immoral”.
Clearly, the S&P downgrade hit a raw nerve with investors worldwide and the general Chinese populace. On China’s largest social media and micro-blogging platform, Weibo, many Chinese netizens raged on their keyboards, highlighting the vulnerability of their motherland. As one micro-blogger commented, “The United States’ sovereign credit rating suffered a downgrade, why did we become the biggest victim?” Yet, another blogger lamented,
“Chinese people are working hard, day in and day out, the economic environment is so good, but people’s livelihoods are not so great – turns out it is because the government is tightening people’s waist belt to lend money to the United States.”
Some observers have suggested that China could easily absolve and relieve itself from the United States’ debt woes and bring the United States to its knees by selling off its US$1.2 trillion of American securities and dollars. In 2010, when the United States signed an arms agreement deal with Taiwan, generals from the People’s Liberation Army publicly threatened to use China’s debt holdings as a weapon. China’s top central bankers, however, wisely declined and paid no heed to such suggestions.
China has invested nearly half of the country’s US$3.2 trillion worth of foreign currency reserves in U.S. Treasuries, and no other country comes close to this figure. Japan, the next largest buyer of U.S. Treasuries, holds US$912 billion.
Whether China’s bears, zealots and patriots realise it or not, China has few options other than to continue its open market operations in order to keep its currency weak and protect its export-driven regime.
As Patrick Chovanec, professor at Tsinghua University’s School of Economics and Management and leading commentator on Sino-American relations, described in a recent National Public Radio interview, China may be unhappy with the U.S. debt mismanagement, but “unless it dramatically changes its approach to its own economy, it is pretty much along for the ride.”
Read the full story by Michele Lin on EconomyWatch: Sino-American Power Play: Why China Has to Buy U.S. Debt