Committee for a Responsible Federal Budget

China: Nervous over US Policy Management

Nov 11, 2010 | Economics

As taxpayers, politicians, journalists and wonks grapple with the wide-ranging fiscal plan launched by the chairmen of the President’s debt commission and the fiscal process recommendations issued by our own Peterson-Pew Commission on Budget Reform yesterday, we have gotten a message from the others side of the Pacific about how big the stakes are internationally – although the timing is coincidental.

On the eve of the G-20, one of China’s large debt ratings agencies slightly downgraded US sovereign debt, from AA to A+ with a “negative outlook”. (In contrast, the major global ratings agencies have not downgraded US debt from the highest credit ratings.) The Dagong Global Credit Rating Co. tied its downgrade to the Fed’s recent decision to provide more stimulus to the economy through a second round of large scale purchases of government debt (known as “quantitative easing” or QE2).

According to Dagong, plus recent statements by a top advisor to China’s central bank and Vice Minister Zhu Guangyao, the worries are that: the Fed’s QE2 increases the risk of US inflation; the Fed is monetizing the large US fiscal debt; and the Fed’s new policy move is lowering the dollar, which will help US – and hurt China’s – competitiveness and devalue China’s holdings of US debt (largely dollar-denominated).

Apart from the issue of whether the Fed’s actions were appropriate, the reactions of Dagong and top Chinese leaders illustrate the sensitivity of the Chinese to our debt situation – no matter what we do.

Reactions to the Fed’s move show that if the Fed does all the heavy lifting on the economy and the prospects for managing our fiscal house are bleak, our creditors will be worried, too. To get our fiscal house in order is important for domestic and international reasons – and it is impossible to separate the two worlds.

It is time for the serious fiscal conversation to start in America.