Tags: china | US | Treasurys | Bomb | bonds

Chinese Media: US Treasurys Are 'Ticking Bomb'

Wednesday, 03 Aug 2011 07:26 AM

 

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China's central bank governor urged Washington on Wednesday to act responsibly to deal with its debt, saying uncertainty in the U.S. Treasurys market will undermine the international monetary system and hamper global growth.

The remarks by Zhou Xiaochuan, head of the People's Bank of China, marked China's first official response to the passage of a U.S. deficit-cutting deal hammered out in Washington to avert a debt default.

They were published on the central bank's website and contrasted with a harsher tone adopted by Chinese media.

The state Xinhua News Agency said the squabbling in Washington had been a "madcap farce" and it described U.S. debt as a "ticking bomb."

"It is advisable that one should not mess around on the edge of an abyss," Xinhua said in a commentary piece. As an official media outlet, the agency is believed to reflect Beijing's thinking, although its comments are not directly approved by top leaders.

The Chinese comments come after weeks of bitter wrangling among U.S. lawmakers that alarmed financial markets and brought the country to the brink of a debt default that some pundits predicted would be a catastrophic.

As the largest foreign creditor to the United States, China is particularly vulnerable to U.S. debt strains.

Beijing has repeatedly urged Washington to protect its dollar investments, estimated by analysts to account for about two-thirds of its $3.2 trillion in foreign exchange reserves, the world's largest.

BOLSTER CONFIDENCE

The PBOC's Zhou welcomed U.S. progress in dealing with its debt problems but called on Washington to take "concrete and responsible" measures to bolster confidence in U.S. Treasurys, of which China is a major buyer.

"Big fluctuations and uncertainty in the U.S. Treasury market will influence the stability of international monetary and financial systems, thus hurting the global economic recovery," Zhou said in the website statement.

"We hope that the U.S. government and the Congress will take concrete and responsible policy measures ... to properly deal with its debt issues, so as to ensure smooth operation of the Treasury market and investor safety."

U.S. President Barack Obama signed into law on Tuesday a measure to cut spending and raise the U.S. debt ceiling.

"We welcome such progress," Zhou said. "We will further study details of the measures and closely monitor how they would be implemented in various stages."

Markets are now waiting to see if credit rating agency S&P cuts the prized U.S. AAA rating. The debt plan calls for savings of $2.1 trillion over 10 years, nearly half the amount S&P has said would be enough to support the current rating.

Moody's and Fitch confirmed their AAA ratings on Tuesday but threats of future downgrades remained.

A Chinese ratings agency cut its rating for the United States to A from A-plus, putting it on a par with the likes of Spain and Estonia. It said the debt deal does not improve the nation's debt-paying ability in the long run.

China has said it intends to diversify away from U.S. Treasurys, a policy Zhou reiterated on Wednesday.

However, Li Xiangyang, a researcher at the Chinese Academy of Social Sciences, called on China to stop investing its foreign exchange reserves in dollar assets to make China less vulnerable to fluctuations in the value of the dollar.

"The raising of the U.S. debt ceiling is a double-edged sword for China," Li wrote in an article published in the People's Daily's overseas edition.

Still, China has few attractive alternatives. The euro, the best dollar alternative, is mired in the bloc's debt crisis.

China has lobbied for the IMF's Special Drawing Right to become a dollar substitute as a reserve investment, but accepts such a system would take years to adopt.

"SOWING THE SEEDS"

Xinhua's commentary was the latest scolding of Washington dished out by China's media during the U.S. debt crisis.

It said global investors had been kidnapped not only by the U.S. economy but also by the domestic political squabbles.

"The madcap farce of brinkmanship has disclosed yet another ticking bomb in the heartland of the sole superpower in the world -- the crippling tendency to politicize the economics while trivializing the politics," Xinhua said.

"Should Washington continue to turn a blind eye to its runaway debt addiction, its already tarnished credibility will lose more luster, which might eventually detonate the debt bomb and jeopardize the well-being of hundreds of millions of families within and beyond the U.S. borders."

It added that the debt deal would not get to the root of the problem, instead sowing the seeds for future debt risks.

"Now, it may become a consensus of the global market that there are risks in U.S. Treasurys and that it's best not to get involved too much with them," said the commentary.

The U.S. plan to cut spending might mean a slower U.S. recovery that could drag on China's own economic growth, some Chinese economists warned.

"U.S. consumption will definitely be hurt by the austerity deal and we can no longer count on the once-biggest foreign market in the future," said Ding Yifan, a researcher at the Development Research Centre under the State Council.

He added that the U.S. debt problem could spur China to hasten its economic restructuring, which aims to lessen a reliance on external demand and increase the focus on domestic consumption.

"Such a shift could also warrant an end to a quick accumulation in foreign exchange reserves and reduce our exposure to the turbulence in U.S. Treasury market," he said.

© 2014 Thomson/Reuters. All rights reserved.

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