Analysis: Behind the bluster, China reprices U.S. risk

Chinese editorials flaying Washington for fiscal recklessness over its debt dramatics and downgrade mask a growing unease in Beijing: a fear that China's own economic policies are shifting too slowly.

Interviews with a dozen high-ranking Chinese officials and government economists revealed frustration with China's self-imposed fetters to the U.S. dollar and louder calls for a change, but no clear short-term plan to break free.

The obvious answer -- allowing the yuan to rise more rapidly -- carries economic and political costs that China is probably not yet prepared to pay.

One idea that appeared to be gaining some traction in Beijing is to loosen restrictions on Chinese businesses and citizens investing abroad. That would help to reduce the build-up of cash inside China.

But it would only marginally trim China's U.S. exposure. An estimated two-thirds of China's $3.2 trillion in reserves is invested in U.S. dollar-denominated assets such as Treasuries, and the pile of cash grows each month thanks to a heavy trade surplus.

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Standard & Poor's stripped the United States of its prized AAA rating on Friday, citing the government's rising debt burden, drawing a blast of criticism from official China media.

Some officials who spoke to Reuters sounded resigned to their fate, acknowledging that there is no viable alternative to investing in U.S. Treasury debt.

But others saw the U.S. debt debacle in recent weeks as just the sort of shove Beijing needs to speed up domestic reforms.

"We need to diversify to the greatest extent possible," said one People's Bank of China official who spoke on condition of anonymity because he was not authorized to speak to the media.

"China's position has always been very clear," he said.

"First, we'll demand strongly that the United States strengthen its self discipline -- they can't just keep issuing debt without limit. Secondly, we need to speed up the pace of our domestic economic transformation and reduce our accumulation of foreign exchange reserves."

PUBLIC SHAME

China's public response to the U.S. debt troubles, expressed in a series of scathing commentaries in the state-controlled media, has been to censure Washington for neglecting its responsibility as issuer of the world's primary reserve currency and trying to "borrow its way out of messes of its own making".

But in interviews with Reuters, some officials quietly acknowledged Beijing's own policies have put China in an uncomfortable position, and argued they would have to change.