August 7, 2011 / 3:04 AM / in 8 years

China state paper says U.S. debt downgrade a "warning bell"

BEIJING (Reuters) - China’s top newspaper on Sunday warned that Asian exporters could be among the biggest victims of mounting U.S. economic woes after Standard and Poor’s downgraded the United States’ sovereign credit rating.

Although Beijing officials have so far been publicly mute about the blow to Washington after Standard and Poor’s stripped the United States of its cherished top-tier AAA credit rating, the People’s Daily, the main newspaper of China’s ruling Communist Party, gave a bleak assessment of the potential consequences for China and other emerging economies.

“The lowering of the United States’ long-term sovereign credit rating has sounded a warning bell for the international currency system dominated by the U.S. dollar,” said economist Sun Lijian, writing in the paper.

The United States government may not be able to recover its top-grade credit score if its deficit continues to grow, Sun wrote in a brief commentary about the move.

“Yet the biggest victims may not be the United States itself, but other countries that have depended on external demand to amass national wealth — be they Asian nations that depend on exporting goods or nations in Latin America and the Middle East, as well as Russia, that depend on exporting resources,” he wrote.

Such countries include China, the world’s biggest foreign holder of U.S. Treasuries.

“They all face the risk that the U.S. treasury debt that they hold will plunge in value, leading to a deterioration in liquidity,” wrote Sun.

Such comments, like a commentary from the Xinhua news agency on Saturday, do not amount to a definitive response from the government. But they echo warnings from policy advisers that Beijing must accelerate the diversification of its holdings.

Many exporters depend on American consumer spending for orders, and the U.S. trade deficit with China hit a record $273 billion in 2010.

Beijing has urged Washington to protect China’s dollar investments, estimated to total about two-thirds of its $3.2 trillion in foreign exchange reserves, the world’s largest.

The debt problems may force the United States to ease monetary policy further by embarking on a third round of quantitative easing, Sun wrote.

That could arrest a fall in the value of U.S. treasury debt, “but it would also lead to a depreciation in the dollar and its rate of return, damaging the value of the large amount of dollar assets held by creditor countries,” he wrote.

On Saturday, Xinhua condemned the United States for its “debt addiction” and “short sighted” wrangling and said the world needed a new global reserve currency.

The Foreign Ministry, central bank and other government agencies, however, have made no comment on the downgrade, and are likely to remain more cautious about any remarks that could undermine the value of China’s dollar-held assets.

Reporting by Chris Buckley; Editing by Ken Wills and Ron Popeski

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