China, the largest foreign holder of U.S. debt, is livid over the downgrading of the American government's credit rating. In a "searing commentary" published over the weekend, the official New China News Agency called on the U.S. to "cure its addiction to debts" and "learn to live within its means." China holds $1.2 trillion in Treasury bonds, and roughly another $2 trillion in dollars. Beijing could do serious damage if it decides to dump U.S. assets. How worried should Washington be about China's "caustic" reaction to the downgrade?
China's bluster is utterly meaningless: If you believe all the "chest-thumping" in Beijing, says Bill Powell at Fortune, the Chinese are about to "take their hard-earned money and go home." But China's boom depends on keeping its currency undervalued so it can sell tons of goods cheaply overseas. If it stops investing its trade surplus in the U.S. and spends it at home, the value of China's own currency, the yuan, will rise. Then China's exports will get expensive, and its boom will end. "There is no chance — none — that this will happen."
"The downgrade: What it really means to China"
If China finds an alternative, we are in trouble: China is piling up huge trade surpluses, says David Barboza at The New York Times. It has $3 trillion in foreign exchange reserves, and "there are few places big enough to invest those holdings safely outside of United States Treasuries." But this scare does underscore Beijing's need to diversify. If it ever does find other places to stash its money, the value of the dollar will plummet and "America's borrowing costs would rise sharply."
"China tells U.S. it must 'cure its addiction to debt'"
How times have changed: It's striking to hear China — "ostensibly a communist nation" — lecturing Washington in the ways of capitalism, and responsible financial management, says Kurt Brouwer at MarketWatch. Tighten your belt? Get over your debt addiction? It sounds like Tea Partiers have taken over the Chinese government.
"China and the U.S. debt addiction"