China criticises US for failing to rein in borrowing
Published 04/08/2011 | 05:00
China, the largest foreign investor in US government securities, joined Russia in criticising American policymakers for failing to ensure borrowing is reined in after a stopgap deal to raise the nation's debt limit.
People's Bank of China governor Zhou Xiaochuan said China's central bank would monitor US efforts to tackle its debt, and state-run Xinhua News Agency blasted what it called the "madcap" brinkmanship of American lawmakers.
Russian Prime Minister Vladimir Putin said that the US was in a way "leeching on the world economy".
The comments reflect concern that the US may lose its AAA sovereign rating after President Barack Obama and Congress put off decisions on spending cuts and tax increases to ensure the enactment of a boost in borrowing authority.
China and Russia, holding a total $1.28 trillion (€890m) of treasuries, have lost nothing so far in the wake of a rally in the securities this year.
"It's probably frustration more than anything else for China," said Brian Jackson, a senior strategist at Royal Bank of Canada in Hong Kong. While the nation has concerns, "they realise there's not a lot of options for them out there so they need to keep buying Treasuries".
China held $1.16tn of treasuries as of May, US Treasury Department data shows. The nation has accumulated the holdings as a by-product of holding down the value of its currency, a policy US officials have said gives China an unfair advantage in trade.
Expressions of concern about the fiscal health of the US and the impasse among lawmakers have failed to dent demand for the securities, with yields on 10-year notes declining to the lowest levels since November. Two-year yields fell to a record low in Tokyo trading yesterday.
Investors in treasuries earned 3.12pc in the three months ending July 31, based on Bank of America data. That means a $10m holding earned $312,000 in the period.
China's central bank welcomed this week's legislation that raised the US debt limit, preventing a default, and will "closely observe" the implementation, Mr Zhou said in a statement yesterday.
Mr Xinhua said the move "failed to defuse Washington's debt bomb for good".
Standard & Poor's indicated last week that anything less than $4tn in deficit cuts would jeopardise its AAA rating for the US.
The measure enacted by Mr Obama threatens automatic spending cuts to enforce $2.4tn in reductions over the next 10 years.
Mr Obama said yesterday the debt measure was a "first step" on a path that must also include increasing revenue. The $14.3tn debt ceiling will be raised by at least $2.1tn.
"They are living beyond their means and transferring part of the problems on to the world economy," Mr Putin told a youth camp at Lake Seliger outside Moscow this week. "In a way, they are leeching on the world economy."
Moody's Investors Service and Fitch Ratings say their AAA credit ratings for the US may be downgraded if lawmakers fail to enact deficit-reduction measures and the economy weakens.
China's Dagong Global Credit Rating Co yesterday cut its grade for the US to A from A+.
"China hopes the US administration and Congress would take responsible policy measures to handle its debt issue," Mr Zhou said.
He highlighted the global role of US treasuries, saying that any "large fluctuations and uncertainties" in the market for the securities would undermine financial stability and hinder the world economic recovery.