First out of China following the S&P downgrade of the U.S. credit rating last week was scathing criticism. We told you so, the state-approved editorials read. The United States must cure its "addiction" to borrowing.
But the plunge in Chinese stock markets on Monday conveys real anxiety over what impact this will have on the United States's largest creditor.
The Shanghai Composite Index had a rough ride by even its often volatile standards yesterday, closing down 3.8 per cent to 2,526.82, its lowest level since July 2010 and down 20 per cent from its high in November. The smaller Shenzhen bourse fell 3.3 per cent.
The People's Bank also set a new record for the Chinese yuan-dollar central parity exchange rate, dropping it to 6.4305.
State news agency Xinhua tried in vain to calm investors' nerves, calling for international cooperation and pointing out the value in the U.S. move to raise its debt ceiling.
"This is conducive to China's steady growth because the United States is one of China's most important export markets and is also conducive to the security of China's U.S. dollar assets and keeps the exchange rate of the RMB [yuan]against the U.S. dollar stable," its commentary read.
China held an estimated $1.16-trillion in U.S. debt as of May, according to U.S. Treasury Department data, and despite Chinese efforts to diversify its foreign debt holdings, an estimated 70 per cent of the country's $3.2-trillion foreign reserves are thought to be dollar assets.
Also worrying is that China has fewer options available this time if this downgrade should trigger another global economic crisis. In autumn 2008, the country unveiled a massive economic stimulus plan which poured 4-trillion yuan into the economy. China built roads and high-speed rail lines, funded new buildings, used subsidies to encourage its citizens to replace old cars and buy new appliances to make up for falling exports.
It worked, mostly: The country's growth continued at nearly 10 per cent, an incredible rate against the stagnation in the rest of the world.
But this year's economic plan had already taken a more sombre turn as authorities spoke of "rebalancing" and tried to sop up some of liquidity remaining in the Chinese economy, fuelling inflation that hit a three-year high of 6.4 per cent in June. The People's Bank has ratcheted up interest rates and increased banks' reserve ratio requirements, while regional authorities have tightened the rules on home purchases and, in Beijing, even the number of new cars allowed on the road each month.
Bank loans are now harder to get. Big developers like China's Vanke have seen their profits shrink. Many small- and medium-sized enterprises are shutting their doors for good.
Yet the trend continues. Data for China's July consumer-price index is expected this week, and state media are already suggesting another interest rate hike is imminent – the fourth such hike this year – suggesting inflation is still plaguing the Chinese economy unabated.
Still, for all China's complaints and warnings, it has few other options. With a trade surplus with the U.S. continuing, it has to invest its U.S. dollars somehow, and Treasury bonds are still the safest dollar-denominated investment, analysts say.
"In some sense China is like a disgruntled partner who find he or she could not leave a relationship --- it will keep complaining and the complaint can get ever more intense and nasty, but it just can't and won't leave. We can even say that China is addicted to U.S. debt," said Ho-fung Hung, an associate professor at Johns Hopkins University in Baltimore, Maryland.