US can no longer squander borrowed money, says China

TRADE DEFICIT:THE WORLD'S second-biggest economy, China, has warned the US that the days of squandering borrowed money are over and it must learn to live within its means after Standard & Poor's slashed US debt's credit rating for the first time on Friday.

The language in official commentaries in state media to describe the US’s debt woes has been extremely robust, borderline scornful.

“The days when the debt-ridden Uncle Sam could leisurely squander unlimited overseas borrowing appeared to be numbered,” the official Xinhua news agency said in a commentary.

China’s US debt holdings reached a record $1.149 trillion (€810 billion) in April, according to a June treasury department report. “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,” it said. The commentary said the credit rating cut was an “overdue bill that America has to pay for its own debt addiction”.

“Mounting debts and ridiculous political wrestling in Washington have damaged America’s image abroad. The United States has to re-establish the common sense principle that one should live within its means.”

Among the areas suggested where the US could make cutbacks were military spending and social welfare budgets. The wider implications could be even worse, the Communist Party's main newspaper, the People's Daily, warned, as Asian exporters would feel the brunt of the worsening US economy. "The lowering of the United States' long-term sovereign credit rating has sounded a warning bell for the international currency system dominated by the US dollar," economist Sun Lijian wrote in the paper.

“Yet the biggest victims may not be the United States itself, but other countries that have depended on external demand to amass national wealth – be they Asian nations that depend on exporting goods or nations in Latin America and the Middle East, as well as Russia, that depend on exporting resources,” he wrote.

One of those countries is China. The US trade deficit with China hit a record €191 billion in 2010.

“They all face the risk that the US treasury debt that they hold will plunge in value, leading to a deterioration in liquidity,” wrote Mr Sun.

There has been no official response from the government or central bank.

However, the comments in the official media are in line with oft-repeated urgings by senior government advisers that Beijing needs to diversify out of US debt and that a new global reserve currency might be necessary to replace the dollar.

European debt, especially German and French bonds, is a possibility.

Beijing has regularly expressed support for debt-laden European countries which are key markets for Chinese exporters.