America's Credit Downgrade: Is China Behind It?

A well connected publication that covers Asia, The Diplomat, has an interesting bit of analysis about the American credit downgrade and how the Chinese lead the charge. They are not suggesting that America’s credit problems are manufactured: they are real. But they point out that behind the move is not Chinese anxiety about America’s ability to pay them back, but a Chinese desire to directly influence and move American economic policy. We’re over a barrel, thanks to the our own doing, but the Chinese are ready and willing to take advantage. An excerpt:

“The Chinese government has good reasons to care about the strength of American bonds – but fears about repayment aren’t among them. Rather, China is effectively demanding that the United States implement industrial policy on its behalf: by selling more and more treasury bonds, the US government has made it more expensive for China to maintain the strong dollar-renminbi exchange rate it has used for decades to subsidize Chinese exporters.

In order to make Chinese exports competitive, China has for decades been buying US dollars at a renminbi price most analysts consider overvalued – without government intervention, most say, it would be impossible to find someone willing to pay more than 4 RMB for a US dollar. So, as more dollars are released into the market in an effort to stimulate the American economy, Beijing will be forced either to buy a large portion of them at this inflated rate or to accept an exchange rate less favourable to Chinese exports.

Thus, it’s not surprising Dagong cited US monetary policy in its brief downgrade statement, referring to largely uncontroversial ‘quantitative easing’ – a policy recently pursued by the Federal Reserve and several European banks, which increases the supply of dollars – in apocalyptic terms. ‘It is natural that QE3 monetary policy will be enabled for the next step, which will throw the world economy into an overall crisis,’ they wrote. Monetary policy, which is funded by the Federal Reserve, has no direct implications for the Federal budget; if anything, expansionary policy like easing should reduce the burden of the debt.

So what is Dagong’s connection to China’s national bankers? The Wall Street Journal‘s China Real Time blog observed close connections between the ratings firm and the Ministry of Commerce last year, when it was refused certification by the US Securities and Exchange Committee. It quickly fired back, accusing the SEC of discriminating against China and attempting to violate Chinese sovereignty.”

The full analysis is here.