China urges US to ‘live within its means’ By Leslie Hook in Beijing

(Source: Financial Times, London, 7 August, 2011)
China’s official news agency has called for “international supervision over the issue of US dollars” and for the US to “live within its means” in the wake of Standard & Poor’s decision to downgrade America’s credit rating.
The remarks underscore the frustration of China, the world’s second-largest economy and biggest holder of US debt, at having the fate of its foreign exchange reserves so intertwined with US fiscal health.
“The days when the debt-ridden Uncle Sam could leisurely squander unlimited overseas borrowing appeared to be numbered,” said a commentary published by the official Xinhua news agency. “To cure its addiction to debts, the United States has to re-establish the common sense principle that one should live within its means.”
But despite the fiery rhetoric, Beijing’s insistence on keeping tight control over the value of its own currency means it will have to continue investing its swelling foreign reserves in US government bonds for the foreseeable future.
China has the largest foreign reserves in the world, with an estimated two-thirds of the $3,197bn total denominated in US dollars. As the biggest foreign creditor to the US, China stands to lose most from any serious fall in the value of the US dollar.
Other Asian countries, including South Korea and Japan, have voiced concern over US debt in the past but refrained from directly criticising the US following the credit downgrade.
On Sunday both countries said they had not changed their view on US Treasuries following the S&P move.
“Japanese authorities think there is no problem regarding the creditworthiness of US Treasuries and US government bonds will continue to be attractive assets,” a Japanese official said.
In contrast Xinhua said China “has every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets.”
There has been no official comment from Beijing since the downgrade and Xinhua has routinely played the role of attack dog in its commentary on the US crisis, in contrast to Beijing’s more measured formal position. China’s foreign minister called on Friday for the US to enact “responsible monetary policies to maintain the trend of global economic recovery and ensure stable development of the world economy”. In remarks just before S&P announced the downgrade, he also said that China “hopes the US can adopt measures to ensure that the assets held by other countries in the US are safe”.
The lack of an attractive alternative reserve currency to the dollar and the ongoing debt crisis in Europe means that China will be forced to continue buying dollars in the near term.
But America’s continuing debt woes have prompted more voices within China to call for an end to Beijing’s tight control over the renminbi exchange rate, which adds substantially to the country’s foreign reserves.
China “must stop buying US dollars and allow the Rmb exchange rate to be decided by market forces as soon as possible,” Yu Yongding, a former member of the monetary policy committee of the Chinese central bank, wrote last week in the FT. “It must stop policies that result in further accumulation of foreign exchange reserves.”
There is already some evidence that Beijing has this year stepped up its efforts to diversify its reserves into other currencies, including the euro.
Xinhua also called for the US to make substantial cuts to its “gigantic military expenditure and bloated social welfare costs” and said “a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country.”
Additional reporting Lindsay Whipp in Tokyo and Jamil Anderlini in Beijing