It is hard to disagree with the scathing attack by the official Chinese news agency, Xinhua, on the US over its ‘debt addiction' and ‘short-sighted' political wrangling. The criticisms ring true and are among the reasons given by Standard & Poor's for downgrading the credit rating of the US.
The Chinese must be feeling particularly scalded because they have amassed trillions of dollars of US debt in their international reserves, only to see the economic mismanagement in the US resulting in the credit downgrade which now threatens the value of the dollar.
However, the Chinese are in some ways paying the price of the success of their own currency manipulation. In part by keeping the value of their currency, the yuan, artificially low on international markets, the Chinese were successful at winning exports and earning foreign exchange. Ironically, these foreign earnings were put into US treasuries for safe-keeping. Chinese exports to the US also helped underline just how uncompetitive parts of the US economy had become. But, for now, there is little that China can do except vent its anger and call for the creation of a new global reserve currency. It cannot even dump too much of its dollars without devaluing its remaining reserves.
