BEIJING China’s state-run Xinhua news agency on Thursday criticized U.S. leaders for putting the world economy in jeopardy in their wrangling over the debt limit, calling on them to show “some sense of global responsibility.”
China is the biggest foreign holder of US treasury debts, totaling $1.145 trillion, this is one-third of China’s own $3.20 trillion national reserves.
A U.S. default could cause a global recession even worse than the downturn that followed the 2008 financial crisis, and stock markets around the world are already signalling concern, Xinhua said.
Nonetheless, a separate Xinhua piece on Thursday argued that China may have little choice but to continue investing in U.S. Treasury bonds, rather than seeing a total collapse of its holding. The best thing China hopes is that its vast holdings of US Treasury notes can maintain their value, MarketWatch reported Wednesday. The value of US treasury has been on the slide in recent days.
The sharply worded commentary by Xinhua, one of China’s most official media outlets, indicates rising alarm in China over the prospect of a U.S. default, and some of the damage that the debt-ceiling fight has already done to the U.S.'s reputation worldwide.
Senior Chinese officials are appalled by the impasse among U.S. politicians on raising the nations debt ceiling to avoid a default, said Stephen Roach, non-executive chairman of Morgan Stanley Asia Ltd.
Coming so shortly on the heels of the subprime crisis, the debate over the debt ceiling and the budget deficit is the last straw for China, New York-based Roach, 65, said in an e- mailed note today. He said his assessment was based on visits to Beijing, Shanghai, Chongqing and Hong Kong.
“The ugliest part of the saga is that the well-being of many other countries of the world is also in the impact zone” if Republicans and Democrats fail to come to an agreement, Xinhua said.
“With leadership comes responsibility. It is unfortunate and disappointing that when political leaders in Washington spar over who is doing good for their country, they take little account of the world’s economic soundness.”
The Xinhua commentary also criticized a “debt addiction” in the U.S. “With its debt approximating its annual economic output, it is time for Washington to revisit the time-tested common sense that one should only live within one’s means.”
In a separate news-analysis piece, Xinhua said a U.S. default would cause the U.S. dollar to plunge, resulting in surging commodity prices, which could create imported inflation pressures in China.
Even if a default is avoided, a downgrade of the U.S. credit rating could hurt confidence in U.S. Treasurys and may greatly devalued China’s holdings and prompt it to reduce its future purchases of the instruments.
Nonetheless, U.S. Treasury securities remain the safest bonds in the world, and only the U.S. Treasury market is large enough to absorb China’s rapidly growing foreign-exchange reserves, Xinhua said. Other countries debt markets are not large or liquid enough to serve as a destination for a large portion of China’s reserves, worth nearly $3.2 trillion at the end of June.
The biggest problem is that Chinese foreign exchange reserves were so large that a major portion of its funds must be in Treasury debts, which are one of the deepest and most liquid markets in the world. China has the world’s biggest reserves as of June 2011, nearly 3 times that of no.2 Japan.
Moreover, other large sovereign debt issuers such as European countries and Japan are beset with their own problems, making them questionable alternatives to U.S. debt, analysts say.