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China Adds Disapproval To Downgrade

China, the biggest holder of U.S. treasuries, is reacting strongly to the downgrade of U.S. debt. China's official news agency says the country "has every right now to demand that the United States address its structural debt problems and ensure the safety of China's dollar assets." NPR's Frank Langfitt is following reaction in Asia, and talks with host Scott Simon.

Transcript

SCOTT SIMON, Host:

Now, we turn to the part of the world that owns the largest chunk of that downgraded debt: East Asia. The reaction so far in China, the biggest holder of US treasuries, is not encouraging. Xinhua, the government's official news service, lashed out today in a commentary saying the United States is addicted to debt and can no longer borrow its way out of messes. NPR's Frank Langfitt is in Japan, following reaction in the region. Frank, what else did the news agency say?

FRANK LANGFITT: Well, I'd like to read this to you, Scott. I've got it right here. It says: China, the largest creditor of the world's sole superpower, has every right now to demand the United States address its structural debt problems and ensure the safety of China's dollar assets. Now, you know, when you listen to the tone of that, it sounds like an investor kind of ripping into a company's board of directors and telling them to, you know, stop messing around.

SIMON: Is it just politics? Is it just theater? How seriously should that criticism be taken?

LANGFITT: Well, you know, China holds an estimated two trillion dollars in U.S. debt. So, anybody that you owe that much money to you might want to listen to. On the other hand, this is Xinhua, and Xinhua often blows smoke. The official pronouncement that you get from the government are often ratcheted down. We heard similar criticisms through Xinhua last week about U.S. management of the debt. So, I think what you need to do is listen and wait to hear from the top leaders; people like President Hu Jintao of China, to get a better sense of what the real political reaction is here.

SIMON: Frank, of course, two trillion dollars is an awful lot of money and you have to wonder with this downgrade is China likely to try and sell some of those securities?

LANGFITT: Well, this is always the concern. You know, there's the narrative and there's truth to it to some degree that China's kind of America's banker. And the fear is, you know, what if the country stopped lending the United States money? Now, I was talking to some economists in China today and they say China may continue to diversify away from U.S. treasuries but - and I've heard this before - that China's kind of caught in a bit of a trap, and that is if China were to try to dump treasuries, the price is going to drop. It's basic supply and demand; you put a lot out there, price is going to go down if supply goes way up. And that's going to hurt the value of their remaining assets, which, you know, are going to be less than two trillion but not a lot less. That's a lot of money. There's another reason that China would be very hesitant to do this, and that is the more dollars they sell on the market, the dollar falls. Chinese currency would then become relatively more expensive and that would make Chinese exports more expensive on the world market. They're very concerned about their exports. It's very important in terms of their domestic employment. So, that's another reason why they'd be hesitant to kind of try to dump treasuries quickly.

SIMON: And, of course, you're in Japan, the other big holder of U.S. debt. What's the reaction there?

LANGFITT: Much friendlier. Of course, you know, Japan is an ally of the United States. And today there was an unnamed official saying they're not going to change their policy. They still trust the U.S. debt. The Japanese economists said there's another interesting reason why they don't want to get rid of the U.S. debt as well, and it's a monetary one. The yen is very strong right now. And just like with China, it's kind of, in this case, it's hurting exports. They actually sold a lot of yen, the Japanese government, into the market earlier this week to bring the price down to make their exports cheaper. So, if they sell treasuries, they get paid back in yen. That takes yen out of the market. The yen will go up in value. And so like China, this wouldn't be good for the Japanese economy, especially as they're trying to recover from, you know, the earthquake, the tsunami and, of course, the meltdown at the Fukushima reactors.

SIMON: So, does all of this indicate to you, Frank, that the immediate reaction in Asia is going to be limited, even modest, because of the downgrade?

LANGFITT: Well, you can't be sure. I mean, stock markets have been really responsive to the U.S. economy in the last week since I've been here. Last Monday, they went way up when there was the debt deal in Washington. And then when they saw kind of the weakness of the U.S. economy with some of the numbers that came out during the week it went back down. And so, you know, Asian markets are always the first to open in the world. They'll be opening on Monday. I think everybody around the world is going to be watching to see how they react to this. And there's fears that, again, it could get pretty messy.

SIMON: NPR's Frank Langfitt, joining us from Japan. Transcript provided by NPR, Copyright NPR.

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