China: US debt turmoil is 'dangerously irresponsible'

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The Independent Online

China, the world's biggest investor in US Treasuries, turned up the pressure on Washington to sort out its sovereign debt woes yesterday as its official news agency labelled American politicians "dangerously irresponsible" for failing to resolve the crisis.

As nervous investors dumped short-term Treasury bills, China's state-controlled Xinhua news agency said US politicians had "kidnapped" the rest of the world in a "game of chicken" by wrangling over a deal to raise America's $14.3 trillion (£8.7 trillion) debt ceiling.

The agency said many countries would be caught in the "impact zone" if politicians failed to agree a deal by Tuesday's deadline, with China hit particularly hard because $1.2 trillion of its colossal $3.2 trillion of foreign reserves are invested in US Treasuries.

In a sign of investors' nerves, the rate on Treasury bills maturing next Thursday jumped to 0.28 per cent yesterday, from 0.16 per cent on Thursday and virtually zero two weeks ago. By contrast, bills due to expire before Tuesday remained at virtually zero.

Xinhua's comments followed a call from Yu Yongding, a former Chinese central bank adviser, for the country to reduce its US Treasury holdings, saying: "US bonds are not safe, but people think they are. That is a mirage."

China has been "passively diversifying" its fast-growing foreign exchange reserves away from US Treasuries for the past six years, still increasing its holdings of American sovereign debt, but decreasing them as a percentage by acquiring a growing range of other overseas assets, according to David Mann, Standard Chartered's regional head of research for the Americas.

But economists say the rate at which China diversifies away from US Treasuries – and US assets in general – is likely to accelerate as a result of this crisis, even if a last-minute deal to raise the debt ceiling is cobbled together.

Mark Williams, the senior China economist at Capital Economics, said: "China can reduce its share of US Treasuries and there is inconclusive evidence to suggest that maybe it has already done that this year. That could reduce faster if there is a downgrade."

The US economy grew much more slowly than thought this year. GDP was up by 0.4 per cent in the first quarter and 1.3 per cent in the second, not by 1.9 per cent in each, as economists had believed.

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