China warned today that drawn-out efforts to raise the US limit on borrowing had failed to defuse Washington's 'debt bomb', and signalled it would further diversify its holdings away from the dollar.
After months of bitter negotiations with his Republican rivals, US President Barack Obama finally signed an emergency bill last night that averted what would have been a disastrous debt default for the world's biggest economy.
But in a blistering commentary, China's official Xinhua news agency ridiculed the US political process and warned that the deal had done nothing to change the country's addiction to borrowing.
'The months-long tug of war between Democrats and Republicans... failed to defuse Washington's debt bomb for good, only delaying an immediate detonation by making the fuse an inch longer,' the commentary said.
It described the negotiations between the Republicans and Democrats as a 'madcap farce of brinkmanship', and lectured US politicians to take more responsible measures to fix their country's economic problems.
In the first official reaction from a Chinese government body, China's central bank delivered a more measured statement and welcomed the deal. But it nevertheless said it would continue to diversify its foreign currency investments.
'China's foreign exchange reserves will continue following the principle of diversified investment, enhancing risk management and minimising the negative impact of volatility in global financial markets,' People's Bank of China governor Zhou Xiaochuan said in a statement.
'Large fluctuations and uncertainty in the US treasury bond market will affect the stability of international monetary and financial systems, which will hurt global economic recovery.'
Also today, the Chinese rating agency Dagong downgraded the US for the second time since November, with a continuing negative outlook.
China, sitting on the world's biggest foreign exchange reserves of around $3.2 trillion as of the end of June, is the largest holder of US Treasuries and has previously expressed concerns over its investments.
China Investment Corp, set up in 2007 to invest a chunk of the country's hefty foreign-exchange stockpile, has been trying to diversify since the global financial crisis struck in 2008.
The $400 billion sovereign wealth fund has been increasing its already substantial holdings in European bonds to get better returns and prop up debt-laden euro zone countries, which are major buyers of Chinese exports. But analysts said China had no choice but to continue buying US debt in significant amounts for the time being.
Meanwhile, Dagong, which has links to the government, said in a statement it had downgraded the US local and foreign currency credit rating from A+ to A, with a negative outlook.
Dagong has little financial muscle outside of China but has made a name for itself by accusing its three Western rivals - Moody's, Fitch and Standard & Poor's - of causing the financial crisis by not properly disclosing risk.
