China's central bank governor called Wednesday for the U.S. to "take responsible policy measures to handle its debt," a day after the world's largest economy reached a bipartisan deal to reduce its deficit and lift its borrowing limit to avoid a default.
The comments from People's Bank of China Governor Zhou Xiaochuan, posted on the central bank's website, signal China's lingering concern over America's financial health. China is the U.S.' largest foreign creditor, holding at least $1.16 trillion in Treasury securities.
Zhou also warned that stability is needed in the highly traded U.S. debt market, and said China plans to continue diversifying its currency reserves.
"Large fluctuations and uncertainties in (the Treasury) market would undermine the stability of the international financial system and hinder global recovery," he said.
China isn't the only one concerned with the U.S.' financial condition.
Analysts, investors and even ratings agencies question whether the deal reached by lawmakers is aggressive enough to begin to clean up the nation's debt-laden balance sheet and improve its financial condition. The deal raises the debt ceiling by $2 trillion and reduces the deficit by $2.5 trillion over 10 years.
"Concerns about the growth and the health of the U.S. economy are overshadowing the (debt) deal," says Katrina Ell, a Sydney-based associate economist for Moody's Analytics.
A raft of weak economic news is fueling those concerns: The U.S.' gross domestic product expanded by a bare 1.3% annual rate in the second quarter. U.S. manufacturing activity grew less than expected in July. And U.S. consumers cut spending for the first time in almost two years in June.
Asian central banks are especially concerned about the U.S.' financial health because they're the largest foreign holders of U.S. debt. Japan is the second-largest foreign holder of Treasuries, with $912.4 billion. Hong Kong holds $121.9 billion.
Japan's central bank wasn't available for comment Wednesday due to a quiet period before its monetary policy meeting this week.
The Hong Kong Monetary Authority said that it's "closely monitoring" the U.S. debt agreement, and meanwhile, managing its currency reserves in a "careful and prudent manner."
By raising the $14.3 trillion debt ceiling, the U.S. avoids a default on its debt obligations. But that doesn't mean it will escape a downgrade in its credit rating.
Already, Dagong Global Credit Rating, a Chinese ratings firm, downgraded the U.S.' rating Wednesday, noting that the nation's debt is growing faster than its economy.
The downgrade by the little-known firm is having little impact on Asian markets or on investor confidence, however, says Peter Lai, a Hong Kong-based director at DBS Vickers securities firm.
The three major U.S. ratings firms are still reviewing the U.S. credit rating. If one of them does downgrade U.S. debt, it's unlikely to spark a dramatic sell-off in the dollar, says Barclays' Asia currency strategist Nick Verdi.
"Given the state of the U.S. dollar as the world's reserve currency, where do investors put their money?" Verdi asks.
Source: http://abcnews.go.com/Business/china-warns-us-managing-debt/story?id=14227075
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