MercoPress. South Atlantic News Agency

China says there’s no way of escaping dollar dominance… in the short term

The People's Daily: debt deal a positive step and a relief for Beijing

United States' debt woes still threaten the global economy despite the last-minute deal struck by the White House and political party leaders, China's main official newspaper said on Tuesday, adding there was no short-term escape from the dominance of the dollar.

The comments were published by the People's Daily, the chief paper of China's ruling Communist Party.

“Although the United States has basically avoided default, its sovereign debt problems remain unresolved. They have merely been pushed off, and there is a tendency for them to grow,” a brief commentary in the paper said of the US debt deal.

“This has cast a cloud over U.S. economic recovery, and also increased the risks and perils facing the world economy”.

Such comments follow on other recent critical remarks in official media from Beijing, which is worried about its big holdings of dollar assets.

As the largest creditor to the United States, China has repeatedly urged Washington to protect its dollar investments, estimated to account for about 70% of its 3.2 trillion dollars in foreign exchange reserves, the world largest.

But Chinese officials have avoided publicly commenting on the debt showdown in Washington.

The People's Daily said the credibility of US treasury debt had been damaged since the outbreak of the sub-prime mortgage crisis, but other economies still have no way of shaking off dependence on the dollar.

“Although confidence in US debt has suffered a short-term fall, and credit agencies could downgrade its rating, its basic credibility has not altered,” said the paper.

It added that “the dollar remains a hard currency that all countries have no choice but to accept.”

The official China Daily said Beijing is likely to view the plan as a positive step in restoring investor confidence in the dollar and the US bond market.

“The agreement is likely to avert default by Washington and it certainly is a relief for China,” Chen Daofu, a researcher at the State Council's Development Research Centre, was quoted as saying by the newspaper.

Zhu Baoliang, chief economist at a government think-tank the State Information Centre, said a 1 trillion dollars reduction in the U.S. fiscal deficit over the next 10 years was not enough to avert another debt crisis in future.

“As alarm over a debt default eases, China will not suffer any immediate impact,” he was quoted as saying in the China Daily. “But any impact would eventually be seen in the long term.”

Li Xiangyang, a researcher at the Chinese Academy of Social Sciences, said US politicians in the future could ignore creditors' interests while pursuing domestic politics. To escape the dollar trap, China must stop investing its foreign exchange reserves in dollar assets in future, he said.

“The raising of the US debt ceiling is a double-edged sword for China” Li wrote in an article published in the People's Daily's overseas editorial.