Pressure Grows on China to Spur Domestic Consumption

The U.S. credit-rating downgrade is piling more pressure on China to move away from an export-reliant economy that has produced mountains of currency reserves in declining dollars, though Chinese politicians, like those in Washington, often struggle to confront tough policy decisions needed to drive change, The Wall Street Journal reported. Some analysts say that harsh Chinese rhetoric aimed at the U.S. following the downgrade of U.S. debt by Standard & Poor's on Friday demonstrates Beijing's desire to challenge global economic leadership by the U.S., which China believes is in inexorable decline. Yet analysts also say the comments are intended to deflect domestic criticism of the government's own economic management that has allowed the nation's reserves to balloon to more than $3 trillion—by far the world's largest foreign-exchange reserve. In a scathing editorial on Saturday, China's state-run Xinhua news agency called the downgrade "an overdue bill that America has to pay for its own debt addiction and the short-sighted political wrangling in Washington." It also renewed Beijing's call for a "new, stable, and secured global reserve currency." The downgrade is a particular blow to China since it is the largest holder of Treasurys, largely the result of China's policy to encourage exports by holding down the value of the Chinese yuan. It does this by buying dollars from exporters in exchange for yuan, and using those dollars to buy Treasurys—the only market in the world deep and liquid enough to support buying on such a scale. Chinese leaders have publicly fretted about the safety of China's Treasury holdings, now valued at $1.2 trillion. The S&P downgrade gives them more to worry about, while fueling criticism by those in China who say that the government has carelessly handled the profits earned by the "blood and sweat" of Chinese workers. Read more. (Subscription required.)