Tensions between the United States and China are set to escalate after one of China’s top ratings agencies downgraded the rating of US sovereign debt, and launched a blistering attack on US economic policy.
The report by Dagong Global Credit Rating Company is scathing of the US central bank’s policy of printing money, which it says will cause the US dollar to drop, and result in hefty losses for foreign investors in US government bonds. It warns that unless the US stops depending so heavily on loose monetary policy, the country could face “unpredictable risk in solvency in the coming one to two years".
The report is likely to fan fears that China is intending to scale back its purchases of US government bonds, which could put upward pressure on long-term US interest rates, and snuff out the fragile US economic recovery.
Official US data shows that China is the largest investor in US government bonds, holding $US868.4 billion of US treasuries at the end of August, ahead of Japan which held $US836.6 billion.
In its detailed report, Dagong criticises the US government’s efforts to boost the US economy in the wake of the financial crisis. “The credit crunch is still proceeding and even deepening,” it says. Read more.