August 8th, 2011
02:04 PM GMT
In China, the state-run media is full of scathing editorials about America's mounting debt.
Commentary published by the Xinhua news agency over the weekend stated the U.S. should live within its means. The agency said the alarm has rung and Washington politicians need to stop playing chicken.
An article in the Communist Party newspaper Global Times reads "The World Should Kick America's Behind".
The downgrade of U.S. credit by ratings agency Standard and Poor’s from AAA to AA+ is feeding fears in some circles that China could damage the American economy, by selling its massive debt holdings.
However, those fears are based on a couple of myths:
Myth #1: China has dominant ownership over the U.S.economy
China is the largest foreign owner of U.S.debt – with 1.16 trillion dollars worth of Treasuries as of May. That is a big number. However, it is only eight percent of America's total government debt.
Myth #2: China could go on a selling spree
China might look to diversify its holdings over time (as in decades), but analysts say any sudden sell-off of U.S.debt would merely erode Beijing's own financial standing.
Because of China's policy to keep the yuan low against the greenback and support its export sector, much of the nation's wealth is trapped in U.S. dollars.
China is amassing huge dollar surpluses and can only invest those trillions of dollars in a deep and liquid market such as U.S. Treasuries.
What's more, China has done little to reform its economic system - like float the yuan.
So as much as the nation criticizes the U.S., the S&P downgrade is now serving as a wake up call here that perhaps Beijing needs to alter its policies to become less dependent on Washington.
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