China worried about US finances

China has demonstrated concern over the US debt and its ability to pay, but the concerns are largely academic, despite the recent downgrade by the Standard and Poor's rating agency and the recent volatility on the Wall Street.

LOS ANGELES, CA (Catholic Online) - During the debt debate, Chinese officials made headlines warning the US of "consequences" if Congress defaulted on its debt. This is of particular concern to China because the country hold some $3.2 trillion dollars of US debt, mostly in treasury bills. A default could destroy the value of those bills, a catastrophic event that could crash the government's central bank and put an immediate halt to the several years of economic expansion enjoyed by the Chinese. 

However, the Chinese needn't worry. The S&P downgrade, while officially grounded in fundamentals, appears more symbolic that real. Indeed, in the days following the downgrade, the market rejected the conclusion of S&P and purchased government securities in great numbers, pushing their rates to a record 1.9 percent. 

Still, many Chinese officials have been concerned about the dollar and its recent decline in value. The government has considered switching to a new standard currency (away from the dollar) but no substitute can be found. In fact, the Euro, the next natural choice, is itself in sharp decline thanks to the troubles throughout the European Union.

For now, the Chinese appear to be sticking to the dollar, hoping to maintain a pattern of growth as the worldwide economy appears poised to plunge into recession. Of course, any large recession will adversely affect China. If countries such as the US suffer economically, it is likely that demand for Chinese products will diminish and the growth in the country may be halted. Government especially officials don't want that. 

For now, China is holding on to its dollars, and its hopes, that the US economy stabilizes and recovers. The dollar may be volatile, but it's still the best currency in the world, at the moment.

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