China economists sees big risk after downgrade

Chinese economists said the U.S. credit rating downgrade by Standard & Poor's poses great risk to financial markets and expect it to prompt China, the world's biggest holder of U.S. Treasuries, to accelerate the diversification of its holdings.

The United States lost its AAA long-term credit rating from S&P on Friday.

S&P cut the rating to AA-plus on concerns over the government's budget deficits and rising debt burden. The move is likely to raise borrowing costs eventually for the U.S. government, companies and consumers.

"There would be chaos in international financial markets at least in the short term. The most direct impact for China would be the hit on its reserves. The value of China's dollar investments will fall and the shrinking effect may be great," said Li Jie, a director at the Reserves Research Institute at the Central University of Finance and Economics.

Earlier this week, China had urged Washington to act responsibly to deal with its debt issues, saying uncertainty in the U.S. Treasuries market will undermine the global monetary system and hamper global growth.

Beijing has repeatedly urged Washington to protect its dollar investments, estimated by analysts to account for about two-thirds of its $3.2 trillion in foreign exchange reserves, the world's largest.

"China will be forced to consider other investments for its reserves. U.S. Treasuries aren't as safe anymore. There is a class of assets out there that are more risky than AAA, but less risky than AA+. China didn't consider these investments before, but now it would be forced to do so," Li said.

Earlier this week, the United States narrowly avoided a default after lawmakers from across the political divide came together to hammer out a deal that would raise the country's borrowing authority after weeks of rancorous partisan battles.

S&P's downgrade may also push the United States to ease monetary policy further, causing even more uncertainty in global markets, said Ding Yifan, a deputy director at the Development Research Centre, a think tank under the State Council.

"I think the chance of the United States launching another round of quantitative easing is rising, as outside investors may try to avoid dollar assets, leaving the Fed with no choice but to buy their own Treasuries," Ding said.

"If the United States really introduces QE3, it will definitely add more uncertainties to the global economy and could push up the prices of global commodities," he added.

Follow Emirates 24|7 on Google News.