China media say U.S. debt woes show military overreach

By Chris Buckley

BEIJING (Reuters) - Chinese state media on Monday blamed Washington's huge military spending and global footprint for the crisis that led to the U.S. debt rating downgrade, calling for an end to the foreign "domineering" dragging down its economy.

Sharpening their rhetoric over the economic crisis that has sent markets into a tailspin, the Chinese state-run media lambasted both Europe and the United States for the dysfunctions of their democracies and their unsustainable appetite for spending.

The Xinhua news agency also warned the United States against trying to boost exports and growth by letting the dollar weaken, which would have a dramatic impact on China as about 70 percent of its massive reserves stockpile is invested in dollar assets.

One analyst, Yuan Peng, said the unusually blunt attack on the West probably reflected concern among Chinese leaders, facing pressure from popular opinion and the media, to deflect blame for any negative fall-out of the crisis on the country's holdings of U.S. assets.

"Since the collapse of the Soviet Union, the United States, as the world's sole superpower, has relied on its powerful military to meddle everywhere in international affairs, advancing hegemony, and paying no heed to whether the economy can support this," said a commentary issued by China's Xinhua news agency, which noted the heavy bills for America's wars in Iraq and Afghanistan.

"Now is the right time for the United States, trapped in economic hardship, to reflect on its domineering thinking and deeds," said Xinhua, urging Washington to "change its policies of interference abroad."

China is spending heavily on its 2.3-million-strong armed forces, returning to a double-digit increase this year. That has stirred unease among its neighbors and the United States, which has long had a presence in the Asia-Pacific region.

At about $93.5 billion for 2011, China's defense budget is still dwarfed by that of the United States. In February the Pentagon rolled out a record base budget for fiscal year 2012 of $553 billion, though the Obama administration is now looking to trim military spending.

PRESSURE OVER CHINA'S DOLLAR ASSETS

The media comments do not amount to a definitive response to the debt downgrade from China's leaders, who may tread a more careful public line, knowing their comments could stoke market alarm and a political backlash in the United States.

Officials have been mute about the blow to Washington after Standard and Poor's stripped the United States of its top-tier AAA credit rating.

However, media have decried the potential damage to China's growth and huge holdings of U.S. Treasury assets.

"It must be understood that if the U.S., Europe and other advanced economies fail to shoulder their responsibility and continue their incessant messing around over selfish interests, this will seriously impede stable development of the global economy," said a commentary in the People's Daily newspaper, the chief mouthpiece of the ruling Communist Party.

"People have deepening misgivings about the political decisiveness of the Western nations, and this has also seriously hurt global investors' confidence in world economic recovery, exacerbating market turmoil."

The comments exposed pressures on policy-makers handling holdings of dollar assets, said Yuan Peng of the China Institutes of Contemporary International Relations, a government think tank.

"This will certainly have an adverse impact on China, because it is the biggest foreign owner of U.S. treasury debt, and this will affect the security of that debt, raise more questions about it," said Yuan, speaking of the downgrade.

"For China, this is a challenge, because it suggests our holdings of U.S. assets aren't as safe as they were, and the government also needs to explain itself to the people," said Yuan. "Nowadays, the Chinese government also faces pressure from the media and public opinion."

DEVALUATION WARNING

A separate Xinhua commentary also warned Washington against seeking to boost exports and growth by letting the dollar weaken, a move that would lower the value of Beijing's assets.

China owns the world's biggest stockpile of foreign exchange reserves at $3.2 trillion, and is also the biggest foreign buyer of U.S. Treasuries. Analysts estimate about 70 percent of its reserves are invested in dollar assets, including Treasuries, although the exact investment mix has not been disclosed.

"From this point, the U.S. has every motive to maintain a weak dollar," said an English-language commentary from Xinhua.

"Before the U.S. makes any move, please remind it: don't forget your responsibility as the issuer of reserve currency to maintain the stable value of the dollar."

A weaker dollar could impede global recovery, stoke market turmoil and lift dollar prices of commodities, it said.

Ironically, China's recent comments questioning the soundness of the U.S. economy could put fresh pressure on the dollar and in turn hurt the value of its dollar investments.

(Reporting by Chris Buckley; Editing by John Chalmers)