How Will U.S. Credit Downgrade Affect China?

August 5 is an unusual day， when Standard Poor’s cut the U.S.credit rating by a notch to AA-plus in an unprecedented blow citing concerns over the nation’s budget deficits and climbing debt burden， adding the freshly passed debt reduction plan by U.S. Congress wasn’t enough to stabilize the country’s debt situation.

The agency remains negative on the outlook of the new credit rating， signaling that another downgrade is possible in the next 12 to 18 months.

Many countries were taken aback at the unprecedented downgrade of America’s sterling sovereign credit rating. The U.S. stocks experienced a free-fall overnight. China is no exception.

The mainland market fell sharply by almost 4 percent at one-year low， tumbling with a broader Asian equity drop after the United States lost its top-notch AAA rating for the first time in history.

Hong Kong stocks slumped for three consecutive trading days， with the benchmark Hang Seng index dumping over 2，500 points.

The downgrade is cold comfort to China， the largest credit holder of American debt. Two thirds of China’s foreign exchange assets are denominated in U.S. dollars. China has issued several warnings to Washington. Beijing admonished the Obama administration to “cure its addiction to debts” and “live within its means” just hours after the downgrade.

Economists suggest more flexible currency exchange rates and diversified foreign reserves to hedge the risks of a weakening US economy and dollar.

As for export， the external market instability would gradually be felt by Chinese exporters in the rest of the year， as the sovereign debt crisis in the EU and the U.S. credit downgrade has generated more uncertainty about the recovery of the global economy， analysts said.

Others believe the downgrade has not only prompted global economic instability， but is also posing a real threat to value and role of the dollar.

Yet some analysts urged not to overreact to the downgrade. “We need a correct view on the connection between the downgrade and the prospective of the global economy. The two has no direct relation，” Qu Hongbin， the Hong Kong based senior economist with HSBC Holdings， was quoted as saying by Xinhua.

“We’d better pay more attention to the real economy of the U.S. especially its economic data， rather than being overreacted to the downgrade itself，” Qu added.

So what is the tendency after the downgrade and how does it affect China? The Special Report of China’s Foreign Trade this issue will try to explore more on these questions.