The downgrading of the US’s S & P credit rating from AAA to AA+ shined the limelight on something that has been known but perhaps not sufficiently acknowledged — China’s vast foreign holdings. China has $3.2 trillions-worth of foreign reserves, $1.1 trilion in US Treasuries, notes the Guardian. While Chinese government agencies and China’s central bank have so far been mum about the downgrade, People’s Daily, the official Communist party newspaper, issued a scold to the US to “cure its addiction to debts” over the weekend. State-owned newspapers have continued to blast the US, not to mention Europe, for not “living within their means.”
Over the weekend, other Chinese websites including Sina Weibo (aka China’s version of Twitter, which is banned by Beijing) hosted fervent discussions about the S & P downgrade, though not so much to censor the West as to ask why the Chinese government has invested almost half of the country’s foreign reserves in US Treasury securities:
“The United States’ sovereign credit rating suffered a downgrade, why did we become the biggest victim?” one microblogger wrote on Sina Weibo, one of the more popular sites, which had hundreds of such postings. “China is always bowing to the United States, when will China really rise up and cast aside its constant fear of the United States’ reactions!”
“On the question of U.S. debt, China’s strategic decision makers are pigs, they would rather let the people’s money be used by others than let the money be used by their own people,” said one posting over the weekend. The comment soon disappeared, presumably removed by censors.
Noting that “much of the outcry seemed to be more about venting wounded pride than proposing monetary alternatives” — though the Saturday Xinhua editorial blasting the US did say that a new global reserve currency should be created — the New York Times points out that “few other options exist as long as China sees the need to buy tens of billions of dollars each month to keep its currency weak and protect the nation’s export machine.”
China’s economy had 9.5 growth in the second quarter. Last year, it racked up a $273 billion trade surplus with the US. But experts point out, even as China fears for losses in its foreign reserves, it is (not that it will admit it) partly to blame due to its failure so far to shift its economy towards domestic consumption, says the Guardian:
The economy remains investment- and export-driven, leaving it vulnerable to external shocks. But if one long-standing concern has been a double-dip recession, Beijing’s other great anxiety has been controlling politically risky inflation. While a massive stimulus package helped China ride out the storm last time – aiding the global recovery – concerns about rising prices will make officials wary of loosening monetary policy. Either way, they will worry about potential social unrest.
Prices for housing, consumer goods including food and services were up 6.4 percent in China last year.
As one blogger noted:
“Chinese people are working so hard, day in and day out, the economic environment is so good, but people’s livelihoods are not so great — turns out it is because the government is tightening people’s waist belts to lend money to the United States.”
If anyone needed an object less that we now live in a global economy, the events of the past summer have been providing a painful object lesson. The US finds itself saddled with a lowered S & P credit rating and a bad taste in its mouth (not to mention being on the receiving end of heavy criticism from China) after several weeks of deficit-reduction wrangling that turned into debt-ceiling debacle and sullied the US’s image around the world.
The European Union and the International Monetary Fund bailed out Greece in July, after Prime Minister George Papandreou’s government nearly collapsed over disagreements about a package of austerity measures. Financial leaders argued that Greece must be bailed out for fear of contagion, of the debt crisis spreading to other of Europe’s weaker economies. So far, that’s precisely what seems to be in danger of happening as Italy and Spain are now forced to pass austerity measures. A key difference is that both of these countries had already taken measures to reduce their deficits yet still seem in danger of needing the EU and the IMF to step in, as the New York Times points out.
Gloomy news. So, just to make sure you’ve got a good grasp of what’s going on, and because we could all probably use a laugh, here’s a video (thanks, Cathryn!) that sums up the whole mess in 3 minutes, with a nod to the one country that seems to be backing everyone now, China.
(Note: The video was made in 2010 which is to say, the problems the world economy faces now are the same ones it was facing last year and said it was fixing.)
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Photo by futureatlas.com