China Official Media: U.S. Woes Threaten Global Recovery

Reuters reports the chorus of disapproval at the state of Western nations’ finances from Chinese state media including the People’s Daily and Xinhua:

“It must be understood that if the U.S., Europe and other advanced economies fail to shoulder their responsibility and continue their incessant messing around over selfish interests, this will seriously impede stable development of the global economy,” the paper said.

“People have deepening misgivings about the political decisiveness of the Western nations, and this has also seriously hurt global investors’ confidence in world economic recovery, exacerbating market turmoil,” it said.

Beijing officials have so far been publicly mute about the blow to Washington after Standard and Poor’s stripped the United States of its top-tier AAA credit rating on Friday. But state-run media have decried the potential damage to China’s growth and huge holdings of U.S. treasury assets ….

The official Xinhua news agency warned Washington against seeking to boost exports and growth by letting the dollar weaken, a move that would lower the value of Beijing’s vast holdings of U.S. dollar assets ….

“From this point, the U.S. has every motive to maintain a weak dollar,” said an English-language commentary from Xinhua.

“Before the U.S. makes any move, please remind it: don’t forget your responsibility as the issuer of reserve currency to maintain the stable value of the dollar.”

The Globe and Mail’s Mark MacKinnon is unconvinced by the Chinese rhetoric:

The conventional way to read the editorial was something akin to a dealer warning an addict that he might have to cut off supply. Having helped finance the U.S. economic boom by buying up the country’s debt as Americans overspent, China is hinting at moving away from U.S. bonds, a shift that some worry could push the U.S. economy closer to the brink of a new recession or worse.

But doing so would be self-destructive for Beijing. Instead of a dealer and an addict, the U.S. and China more resemble two drunks stumbling down a street with arms slung around each other’s shoulders. From one crisis to the next, it’s unclear if they’re holding each other up or on the verge of tripping.

The Wall Street Journal noted that the stridency of the criticism might be designed to pre-empt any blame directed at Beijing:

Some analysts say that harsh Chinese rhetoric aimed at the U.S. following the downgrade of U.S. debt by Standard & Poor’s on Friday demonstrates Beijing’s desire to challenge global economic leadership by the U.S., which China believes is in inexorable decline.

Yet analysts also say the comments are intended to deflect domestic criticism of the government’s own economic management that has allowed the nation’s reserves to balloon to more than $3 trillion—by far the world’s largest foreign-exchange reserve ….

The downgrade is a particular blow to China since it is the largest holder of Treasurys, largely the result of China’s policy to encourage exports by holding down the value of the Chinese yuan. It does this by buying dollars from exporters in exchange for yuan, and using those dollars to buy Treasurys—the only market in the world deep and liquid enough to support buying on such a scale. Chinese purchases of U.S. Treasurys have helped to keep U.S. interest rates low for years, contributing to the housing bubble that eventually tanked the global economy.

The newspaper’s China Real Time Report explored Beijing’s limited alternatives for investment:

China might not be able to do much about the estimated $1.2 trillion it already has invested in Treasury securities. A fire sale would spook the markets, engineering the crash China is so keen to avoid.

But new flows into reserves are substantial—an average of $64 million every hour of every day in the first quarter of this year—and here China has more flexibility on where to invest. Many experts believe that Washington’s dance on the debt ceiling has likely added to Beijing’s desire to find alternative investment options.

Analysts have pointed to a larger-than-usual gap so far this year between China’s recorded Treasury purchases and its total new foreign-exchange reserves—suggesting more of the new money is going elsewhere.

But what options does China have?

At the Financial Times, Yu Yongding argued that the problem was not where to put the money:

If there is any lesson China can draw from the US debt ceiling crisis, it is that it must stop policies that result in further accumulation of foreign exchange reserves …. The People’s Bank of China must stop buying US dollars and allow the renminbi exchange rate to be decided by market forces as soon as possible. China should have done so a long time ago. There should be no more hesitating and dithering.

See also: China Tells U.S. It Must ‘Cure Its Addiction to Debt’, via CDT.