China Tells U.S. It Must ‘Cure Its Addiction to Debt’

By DAVID BARBOZA
Published: August 6, 2011

SHANGHAI — China, the largest foreign holder of United States debt, said on Saturday that Washington needed to “cure its addiction to debts” and “live within its means,” just hours after the rating agency Standard & Poor’s downgraded America’s long-term debt.

The harshly worded commentary, which was released by China’s official Xinhua news agency, was Beijing’s latest effort to express its displeasure with Washington.

Though Beijing has few options other than to continue to buy United States Treasury bonds, Chinese officials are clearly concerned that China’s substantial holdings of American debt, worth at least $1.1 trillion, are being devalued.

“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 messes of its own making are finally gone,” read the commentary, which was published in Chinese newspapers.

Beijing, which did not release any other official statement on the downgrade, called on Washington to make substantial cuts to its “gigantic military expenditure” and its “bloated social welfare” programs.

The commentary serves as a sharp illustration of how America’s standing in the world is sliding and that China now views itself as ascendant.

While Washington wrangles over its debt and deficit problems and the European Union struggles to deal with its own debt issues, China is sitting on the world’s largest foreign exchange holdings and its economy is growing at close to 9 percent. The country is also once again racking up huge trade surpluses with the rest of the world.

Beijing does have its own worries, like soaring inflation and housing prices and trying to cool off an over-heating economy. Policy makers are also trying to deal with the accumulation of huge foreign exchange holdings tied to its trade and current account surpluses.

Beijing policy makers are discussing ways to diversify the country’s foreign exchange holdings away from dollars and also how to encourage Chinese companies to invest some of the foreign reserves overseas.

But because China has about $3 trillion in foreign exchange reserves, there are few places big enough to safely invest those holdings outside of United States Treasuries, even though it looks like they may lose value.

Analysts say that if China pulls back from buying Treasuries, the dollar would weaken and America’s borrowing costs would rise sharply, but that would also hurt China’s existing holdings.

And so until China can find a way to slow its accumulation of dollars or find alternatives, it is likely to be the largest buyer of Treasuries.

Still, government leaders here increasingly sound like they are losing confidence.

“International supervision over the issue of U.S. dollars should be introduced and a new stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country,” the Xinhua commentary said.

NYT