China, the largest foreign investor in U.S. government securities, joined Russia in criticizing American policy makers 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 will monitor U.S. efforts to tackle its debt, and state-run Xinhua News Agency blasted what it called the “madcap” brinksmanship of American lawmakers. Russian Prime Minister Vladimir Putin said two days ago that the U.S. is in a way “leeching on the world economy.”
The comments reflect concern that the U.S. may lose its AAA sovereign rating after President Barack Obama and Congress put off decisions on spending cuts and tax increases to assure enactment of a boost in borrowing authority. China and Russia, holding a total $1.28 trillion 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 realize there’s not a lot of options for them out there and so they need to keep buying Treasuries.”
China held $1.16 trillion of Treasuries as of May, U.S. Treasury Department data show. The nation has accumulated the holdings as a by-product of holding down the value of its currency, a policy U.S. officials have said gives China an unfair advantage in trade.
Expressions of concern about the fiscal health of the U.S. and the impasse among lawmakers have failed to dent global 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 today.
Investors in Treasuries earned 3.12 percent in the three months ending July 31, based on Bank of America Merrill Lynch data. That means a $10 million holding earned $312,000 in the period.
China’s central bank welcomes this week’s legislation that raised the U.S. debt limit, preventing a default, and will “closely observe” the implementation, Zhou said in a statement on the central bank’s website today. Xinhua said the move “failed to defuse Washington’s debt bomb for good,” in a commentary dated yesterday.
Standard & Poor’s indicated last week that anything less than $4 trillion in deficit cuts would jeopardize its AAA rating for the U.S. The measure enacted by Obama yesterday threatens automatic spending cuts to enforce $2.4 trillion in spending reductions over the next 10 years.
Obama said yesterday the debt measure was a “first step” on a path that must also include increasing revenue. The $14.3 trillion debt ceiling will be raised by at least $2.1 trillion.
“They are living beyond their means and transferring part of the problems onto the world economy,” Putin told a youth camp at Lake Seliger outside Moscow Aug. 1. “In a way, they are leeching on the world economy.”
Moody’s Investors Service and Fitch Ratings say their AAA credit ratings for the U.S. may be downgraded if lawmakers fail to enact deficit-reduction measures and the economy weakens. China’s Dagong Global Credit Rating Co. today cut its grade for the U.S. to A from A+ with a negative outlook.
“China hopes the U.S. administration and the Congress would take responsible policy measures to handle its debt issue,” Zhou said. He highlighted the global role of U.S. Treasuries, saying that any “large fluctuations and uncertainties” in the market for the securities would undermine financial stability and hinder the world economic recovery.
The Xinhua commentary said that the higher debt ceiling and plans to reduce spending were not enough to make any sizable dent in the nation’s fiscal burden. It referred to a “madcap farce of brinksmanship” before the agreement was reached.
A previous Xinhua commentary on clashes between Republicans and Democrats said that “the ugliest part of the saga is that the well-being of many other countries is also in the impact zone when the donkey and the elephant fight,” referring to the symbols often used for the Democratic and Republican parties.
Obama signed the debt-limit compromise yesterday. The measure raises the ceiling until 2013.
In his statement, Zhou also commented on China’s foreign- exchange reserves, which are the world’s largest at more than $3 trillion.
The Asian nation will continue to “seek diversification in the management of reserve assets, strengthen risk management, and minimize the negative impacts of the fluctuations in the international financial market on the Chinese economy,” Zhou said. China will also take “effective measures to maintain relatively rapid growth to safeguard economic and financial stability,” he added.
--Zheng Lifei. With assistance from Anton Doroshev and Jack Jordan in Moscow and Wes Goodman in Singapore. Editors: Chris Anstey, Ken McCallum
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