China hits out at US debt ‘addiction’ after downgrade

BEIJING—China hit out at the United States on Saturday after its unprecedented ratings downgrade, with state media saying that the world’s largest economy needed to cure its “addiction” to debt.

Other Asian nations, such as Japan and South Korea, reacted cautiously and along with Australia warned against over-reaction after Standard & Poor’s cut the US rating from the top notch triple-A to AA+ on Friday.

But Beijing, the largest foreign holder of US Treasuries, said in a stinging English-language commentary carried by the official Xinhua news agency that it had “every right” to demand Washington address its structural debt problems and safeguard Chinese dollar assets.

Washington needed to “come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone,” Xinhua said.

“To cure its addiction to debts, the United States has to re-establish the common sense principle that one should live within its means,” the commentary added.

Officials in Japan, which has the second-largest US debt holdings, gave a more measured response, saying their trust in US Treasuries remained unchanged.

S&P said politicians in Washington were becoming less able to get to grips with the country’s huge fiscal deficit and debt load.

The ratings agency gave a negative outlook for the US, saying there was a chance its rating could be cut again within two years if progress is not made cutting the government budget gap.

Friday’s downgrade followed days of heavy losses on stock markets around the world, as investor confidence was hammered by fears for the US economy and a warning that the eurozone debt crisis had likely spread.

But Japanese officials said S&P’s move would not affect Tokyo’s approach to investing in US debt.

“The trust we have in US Treasuries and their attractiveness as an investment will not change because of this action,” an unnamed senior Japanese government official told Dow Jones Newswires.

Another official also said that Japan’s investment policy regarding its foreign reserves remains unchanged, the newswire said.

Japan is unlikely to sell any of its dollar-denominated assets as it is fighting to stem the yen’s rise to near a record-high against the greenback.

The deputy governor of the central bank in Taiwan, the sixth biggest holder of US securities, said the downgrade was expected to have “no impact” on the island.

Hong Kong, also one of largest holders of US Treasuries, said the downgrade was “well within market expectations” after S&P gave the US a negative outlook in April but added it was possible other agencies would follow suit.

Francis Lun, managing director of Hong Kong financial services firm Lyncean Holdings, said S&P’s judgment was right.

“Basically in the mind of the Chinese government and investors in Asia, the US does not merit the triple-A rating, it’s not 24-carat gold anymore,” he said.

“(Washington) has been spending like there’s no tomorrow… they have been irresponsible fiscally so they deserved it (the downgrade),” he added.

South Korea held an emergency finance ministry meeting to discuss possible fallout from the downgrade.

“There is possibility that South Korea’s economy might be affected in the short term,” Vice Finance Minister Yim Jong-Yong said after the meeting.

“However, there is no need to be concerned excessively about our economy and financial markets.”

Australian Prime Minister Julia Gillard also urged a measured response to the downgrade, pointing out that it was not unexpected and the two other key agencies, Moody’s and Fitch, still rated US debt at top grade.

Xinhua, which on Wednesday criticized the deal to raise the US debt ceiling as failing to defuse the country’s “debt bomb”, said on Saturday international supervision “over the issue of US dollars” should be introduced.

It questioned the dollar’s status as the world’s dominant reserve currency, saying “a new, stable and secured global reserve currency may also be an option to avert a catastrophe called by any single country”.

The Philippines’ finance secretary Cesar Purisima echoed the call, saying the downgrade “highlights the need for alternative global reserve currencies and benchmarks that are more stable and as liquid and convertible.”

In Kuala Lumpur, Yeah Kim Leng, a senior economist with financial research firm RAM Holdings, said he expected Asian market reaction to S&P’s move to be “muted” as the downgrade had already been priced in.