China sees big risk to markets after US downgrade

By REUTERS
August 6, 2011 07:21

SHANGHAI - Chinese economists said the US 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 US 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 US 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 US Treasuries market will undermine the global monetary system and hamper global growth.


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