China Is Thoroughly Unimpressed by U.S. Debt Deal
Yesterday we wrote about how Washington's last-minute deal to raise the debt ceiling and cut spending had failed to settle the stock market, which tanked on more signs of a sluggish economic recovery. Today we're hearing from another disgruntled constituency: China. Within hours of Moody's and Fitch--two of the "big three" Western credit rating agencies--announcing that they would maintain America's AAA credit rating, one of China's major private credit rating agencies downgraded its U.S. credit rating from A+ to A--a level, Reuters points out, that puts the U.S. on par with Spain and Estonia. "The squabbling between the two political parties on raising the U.S. debt ceiling reflected an irreversible trend on the United States' declining ability to repay its debts," Dagong Chairman Guan Jianzhong told CNN.
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China's state-run media is issuing even sharper critiques. In an editorial for the state-run news agency Xinhua today, Deng Yushan--who condemned U.S. politicians last week for playing a "game of chicken" as the global economy hung in the balance--once again criticized Washington's "madcap farce of brinkmanship" and "blind eye to its runaway debt addiction." The deal, he continued, "failed to defuse Washington's debt bomb for good, only delaying an immediate detonation by making the fuse an inch longer." A Global Times editorial similarly observed that "raising the debt ceiling simply means the U.S. can now borrow itself into further debt." In the People's Daily overseas edition, a Chinese researcher urged China to stop investing its foreign exchange reserves in volatile dollar assets, deeming the raising of the U.S. debt ceiling "a double-edged sword for China."
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Meanwhile, Chinese authorities, who have stayed silent on the U.S. debt crisis in recent weeks, remain cautious. In the country's first official statement today, People's Bank of China Governor Zhou Xiaochuan welcomed the debt deal but warned that his organization would "closely observe" the U.S. effort to reign in its debt and restore confidence in U.S. Treasuries, and that China would seek to diversify its foreign exchange reserves, according to Reuters. The news agency adds that while Chinese officials don't directly approve the content of state-run news outlets, these sources are "believed to reflect Beijing's thinking."
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It's unclear, however, whether Dagong's credit downgrade and scathing editorials in China's state-run media pack a real punch. CNN points out that Dagong's move could ironically hurt China--the largest foreign owner of U.S. debt--as much as the U.S if the downgrade negatively affects Treasurys. But The Wall Street Journal is skeptical of the Dagong's, which it suggests could partially be a publicity stunt "by an obscure firm trying to expand overseas." The paper adds that while it's conceivable Dagong sees something the major Western agencies haven't caught onto yet, China's "domestic rating system still has a long was to go." What's more, China doesn't have many places to dump its prodigious foreign exchange reserves beyond Treasurys. "The euro, the best dollar alternative, is mired in the bloc's debt crisis," Reuters observes. Even the fuming Global Times admits as much. China's "enormous but depreciating foreign reserves are a pain for the Chinese people, yet there are few options to do away with them," this week's editorial concludes.