The downgrade of US debt has focused attention on how America's largest creditor – the People's Republic of China - will react. Reactions in China have been varied. The most encouraging remarks came from China's premier Wen Jiabao who is considered a relative liberal.
While he subscribed to the general tone in the Chinese press and called for the Americans and Europeans to adopt responsible monetary policies to combat their deficits, he appeared to signal his country's willingness to help get over the crisis.
"The global community should improve the communication and coordination of their macro economic policies to realize sustainable, stable and balanced growth in the world economy."
Economics professor Shi Jianxun represented the general trend that blames the United States for damaging the global economy and called upon creditors of the United States to band together and insist on greater protection for their assets in dollars. He even suggested they demand compensation for their losses. He further urged an early meeting of the G 20 summit to address the problems in the United States and Europe.
A commentary in the official party newspaper People's Daily by Ding Gang, translated in the paper's English subsidiary Global Times, captured the most attention. It effectively recommended that China pull the United States by the economic leash if it went forward with the sale of F-16 fighter planes to Taiwan. This sale reflected American arrogance and disrespect, since it was obvious that China would be the major purchaser of the increased US debt.
China, continued the commentary, could calibrate the economic pain that is inflicted on the United States to react to arrogant actions by the Americans, such as the meeting between Obama and the Tibetan Dalai Lama.
The author conceded that such a Chinese move could also inflict losses upon China, but felt it would still be advantageous to create a linkage between Chinese support for American debt and American policies, while gradually weaning Chinese foreign exchange reserves from their top-heavy exposure to the American currency.
As Gang has already admitted, such a Chinese move is a double-edged sword. First, it would immediately reduce the value of the massive Chinese holdings in dollars. Second, by driving down the price of the dollar, the strategy would make China's currency more expensive and Chinese goods less competitive with severe repercussions for export-led growth.
If the United States would substantially reduce purchases from China, this would dampen Chinese employment. The Chinese government views that as an essential prop to stability.
Finally as other cash-rich Asian countries realize, there are currently few alternatives to American debt. Further deterioration to the American economy may induce the Chinese to search harder for alternatives.