China lectured the United States over its debt crisis on August 6, 2011, just a day after Standard and Poor's downgraded the U.S. debt rating. China is the world's largest holder of American long-term debt with some $1.2 trillion.
Criticism from Xinhua
The tough talk came from the Chinese news outlet Xinhua. While the Chinese government issued no comment on the debt downgrade for fear of agitating markets and further devaluing their American bonds, the Xinhua comments no doubt reflected general political feelings throughout China.
"The days when the debt-ridden Uncle Sam could leisurely squander unlimited overseas borrowing appeared to be numbered," after the rating downgrade, Xinhua said in its opening salvo. The news agency claimed a measure of vindication saying that when the Chinese rating agency Dagong Global degraded U.S. Treasury bonds in 2010, many western commentators reacted with "arrogance and cynicism." Xinhua added, "Now S&P has proved what its Chinese counterpart has done is nothing but telling the global investors the ugly truth."
Background of the Downgrade
Standard and Poor's announced the U.S. debt downgrade after the close of New York stock markets on August 5. S&P had threatened such action as early as April 2011 as members of the U.S. Congress and President Barack Obama argued over raising the national debt ceiling. A resolution to the argument narrowly missed a midnight August 2 deadline that would have signaled American default on some of its debt.
Most Americans believed that avoiding default meant America's AAA "sterling" debt ranking was secure. S&P waited until the end of the business week, then downgraded the U.S. ranking to AA+ with a status of "negative," meaning that a further downgrade was possible, if not likely. The United States had held the AAA rating since 1917 when World War I was cementing its place as one of the world's dominant powers.
Standard and Poor's cited partisan bickering and brinkmanship during the debt ceiling crisis as its chief reason for the downgrade. "The downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned," an S&P statement said.
Xinhua echoed that sentiment, saying the United States "should also stop its old practice of letting its domestic electoral politics take the global economy hostage and rely on the deep pockets of major surplus countries to make up for its perennial deficits." The agency added that "ridiculous political wrestling in Washington have damaged America's image abroad."
China Calls for Regulation of U.S.
Xinhua called, essentially, for an end to American hegemony over world markets, and suggested it needed hand-holding at home. It said the U.S. needed international supervision of its printing of new dollars, and that "a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country." China has been calling for a new world currency to replace the dollar since 2009. The news agency did not say, however, which country or countries should back that currency.
More Xinhua Comments
Among other comments, Xinhua said:
- With its significant U.S. debt holdings, China "has every right now to demand the United States to address its structural debt problems and ensure the safety of China's dollar assets."
- The United States must adopt "common sense" principles to "cure its addiction to debts."
- If the U.S. does not correct its financial situation, "the spluttering world economic recovery would be very likely to be undermined and fresh rounds of financial turmoil could come back to haunt us all."
- Finally, Xinhua commented that the U.S. needed to cut its "gigantic military expenditure and bloated social welfare costs" to help cure its budget deficit.