CHINA’S REACTION TO U.S. CREDIT DOWNGRADE
August 10th, 2011
On August 5th, Standard & Poor’s downgraded the U.S. credit rating from AAA to AA+ and assigned a negative outlook for the future, inciting strong reactions from governments and investors worldwide. With political risks and a rising debt burden cited as the main risk factors, the downgrade occurred as fears mounted over the Eurozone debt crisis. China, as the largest foreign holder of U.S. debt with $3.2 trillion in reserves invested in U.S. dollar-dominated assets, has been the largest critic of the U.S. economic slowdown and European debt crisis.
“The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of the messes it has made are finally gone,” said China’s official Xinhua news agency. China’s response to American debt troubles has been expressed in a variety of harsh commentaries that criticize Washington for neglecting its responsibilities.
With China’s public rebuke of the Western debt crisis, national economists have pondered China’s possible policy reactions. Many are worried China will begin selling off U.S. Treasury notes or even enact sanctions on the U.S. for its economic recklessness. Others have rebuked this claim, saying that due to our countries’ economic interconnectedness, any backlash by the Chinese government would damage its own economy as well.
Despite China’s criticism, these global economic worries have led China to re-evaluate its own economic policies. Analysts have stated that the largest victim of the credit downgrade is not the U.S. itself, but Asian countries whose growth depends on exporting goods, including China. However, many claim the biggest threat concerning China does not come from overseas. The Chinese government still faces domestic problems, such as rising prices, an overheating economy, and skyrocketing housing rates.
“The downgrade in the U.S. credit rating gives China’s government an extremely rare opportunity to reconsider their development strategies,” said Zhang Ming, an economist with the Research Center for International Finance. Although the downgrade implies adverse impacts on the global economy, it has caused China to look more closely at domestic financial reform and a plausible switch to purchasing more U.S. stocks and bonds instead of Treasuries. Of course, if the West plunges into a “double dip” economic recession, battling inflation issues, cutting interest rates, and maintaining a stable economy in China will be made exponentially harder.
Other economists, like Li Xiangyang of the Chinese Academy of Social Sciences, believe that China will not be affected by the crisis of the West and Japan. “The overall situation is healthy… Even if the international environment if worsening, the Chinese government is able to react. It will not be dragged into the crisis by the West,” said Li.
The most common statement amongst economists, investors, and government bodies is that China and the U.S. must maintain cooperation and open dialogue in the upcoming years in order to prevent a global economic slowdown. “Given the challenges they face, both China and the United States have much to gain by working together. As the largest and second-largest economies in the world, the two countries have a responsibility to provide such international public goods as financial stability and less carbon intensive growth,” remarked Harvard University’s Joseph S. Nye, Jr. in a commentary blog on Reuters.
China’s State Council likewise stated that “China urges nations to coordinate and implement concrete and responsible fiscal and monetary policies to secure the safety of investments.” With China’s Vice Premier Wang Qishan and U.S. Treasury Timothy F. Geithner engaging in consultative phone conversations since the credit downgrade and Prime Minister Wen Jiabao urging global cooperation to ease the stress on financial markets, it remains hopeful that the two countries will continue their active collaboration in the future to stabilize the global economy.
Compiled and edited by Jingyi Zhao, Betsy Gass, and Katie Xiao.
For further information on China’s reactions to U.S. credit downgrade, please see the following news sources and commentary:
Google News – “Asia to keep buying US debt despite downgrade”
New York Times –“China Tells U.S. It Must ‘Cure Its Addiction to Debt”
New York Times—“ As Inflation Climbs, Chinese Policy Makers Face a Problem”
Wall Street Journal—“ Double Dip: Would China Bail Out the Global Economy Again?”
Wall Street Journal –“ China’s Downgrade Dilemma”
For Chinese commentaries on China’s reactions to U.S. credit downgrade, please see the following new sources:
Voa News—“美国信用遭降级 北京指民主制失调”
Voa News—“美评级下调为中国敲响警钟 是风险还是机遇？”