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China state media says US debt deal 'hiding risks'

02 august 2011, 17:49
State media in China, the largest holder of US debt, on Tuesday chided the United States over a deal to raise its borrowing limit, saying it was hiding "risks and troubles" for the world economy, AFP reports.

The US House of Representatives late Monday approved a package that would slash spending in return for raising the legal limit on US sovereign debt, in a bid to avoid a catastrophic default.

"Although the United States has basically avoided default, its sovereign debt problems remain unresolved," the People's Daily, a mouthpiece of the ruling Communist Party, said in a commentary.

"They are just deferred and there is a tendency for them to grow. This is casting a shadow over the recovery of the US economy and hiding even bigger risks and troubles for the global economy," the newspaper said.

China, sitting on the world's biggest foreign exchange reserves of around $3.20 trillion as of the end of June, is the largest holder of US Treasuries.

The debate over the debt ceiling, which the newspaper labelled as a "political fight", would hurt the credibility of US Treasuries though a default was "essentially unlikely", it said.

The last-minute deal revealed the long-term risks to China's massive holdings of US Treasuries, Li Xiangyang, a researcher at the official Chinese Academy of Social Sciences, wrote in a separate article in the overseas edition of the People's Daily.

"It is necessary to change the current concentration on US dollar assets, but what is more important is to change the trend of increasing holdings of dollar assets in future. This requires a fundamental adjustment in the economic growth model," Li said.

The official Xinhua news agency chimed in by saying the US remains a "debt economy" and the long-term risks of a default still exist.

The US is very like to let the dollar depreciate to pass off the debt to its creditors, which may cause more flows of speculative funds, or hot money, into emerging economies like China and push up inflation, it said.

"If the US choses to repudiate debt in this hidden manner, it will seriously impact the stable growth of the global economy," Xinhua said.

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