China's central bank governor Zhou Xiaochuan on Wednesday urged the US to act responsibly to handle its debt issues, saying uncertainties in the US treasuries market will undermine the stability of the global monetary and financial system and will be a drag on the global economic recovery.
Zhou welcomed US progress in dealing with its debt problems and urged Washington to take "concrete and responsible" measures to bolster confidence in US treasuries, of which China is a major holder.
It is the first official response from China to the signing of a US deficit-cutting deal after weeks of bitter political debate that brought the country close to a debt default and downgrade of its sovereign credit ratings.
US President Barack Obama signed into law a last-minute compromise plan Tuesday to raise the nation's $14.3 trillion debt ceiling while cutting at least $2.1 trillion in government spending over the next 10 years.
Zhou's remarks came after Dagong Global Credit Rating Co, China's crediting agency, on Wednesday lowered its rating of the US credit from A+ to A with negative outlook, saying that the latest debt deal does not improve the nation's debt-paying ability in the long run.
Credit rating agency Moody's confirmed on Wednesday to keep the US AAA credit rating for the time being, but lowered its outlook on US debt to "negative," indicating the possibility of a downgrade within a year or two.
Whether Standard & Poor's will maintain its credit rating remains unknown. However, the $2.1 trillion deficit-reduction plan falls short of S&P's previous assertion that $4 trillion in deficit-reduction would be needed to show the country's finances are in order.
A credit rating downgrade means the US will have to pay higher borrowing costs in the future, but to its creditors like China, it means investment losses associated with the fall of the dollar. The more it is invested in dollar assets, the more losses will China suffer, in a so-called dollar trap.
Zhou reiterated on Wednesday China's intention to continue diversifying reserves. Still the country has few good options due to the vast size of its foreign reserves and deep liquidity of the US treasuries. The euro is also mired in the bloc's debt crisis.
"Diversification is not the best solution for China. The only solution is to reduce the size of foreign reserves," Zhang Anyuan, a visiting professor with University of International Business and Economics, told the Global Times on Wednesday.
China is restructuring its growth model from export to consumption, and will not invest in US treasuries as much as it does now, said Shen Minggao, chief China economist at Citigroup Inc.
But restructuring will come at a painful cost. To prevent losses from foreign reserve holdings, China has to give up, to a large extent, the wealth generated by the trade surplus, Zhang said.