China says US fails to defuse 'debt bomb'

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China warned Wednesday that tortured efforts to raise the US limit on borrowing had failed to defuse Washington's "debt bomb", and signaled it would further diversify its holdings away from the dollar.

After months of bitter negotiations with his Republican rivals, US President Barack Obama finally signed an emergency bill on Tuesday that averted what would have been a disastrous debt default for the world's biggest economy.

But in a blistering commentary, China's official Xinhua news agency ridiculed the US political process and warned that the deal had done nothing to change the country's addiction to borrowing.

"The months-long tug of war between Democrats and Republicans... failed to defuse Washington's debt bomb for good, only delaying an immediate detonation by making the fuse an inch longer," the commentary said.

It described the negotiations between the Republicans and Democrats as a "madcap farce of brinkmanship", and lectured US politicians to take more responsible measures to fix their country's economic problems.

In the first official reaction from a Chinese government body, China's central bank delivered a more measured statement and welcomed the deal.

 But it nevertheless said it would continue to diversify its foreign currency investments.

"China's foreign exchange reserves will continue following the principle of diversified investment, enhancing risk management and minimizing the negative impact of volatility in global financial markets," People's Bank of China governor Zhou Xiaochuan said in a statement.

"Large fluctuations and uncertainty in the US treasury bond market will affect the stability of international monetary and financial systems, which will hurt the global economic recovery."

Also on Wednesday, the Chinese ratings agency Dagong downgraded the United States for the second time since November, with a continuing negative outlook.

China, sitting on the world's biggest foreign exchange reserves of around $3.20 trillion as of the end of June, is the largest holder of US Treasury bonds and has previously expressed concerns over its investments.

China Investment Corp, set up in 2007 to invest a chunk of the country's hefty foreign-exchange stockpile, has been trying to diversify since the global financial crisis struck in 2008.

The $400-billion sovereign wealth fund has been increasing its already substantial holdings in European bonds to get better returns and prop up debt-laden euro-zone countries, which are major buyers of Chinese exports.

Exact figures on the size of China's euro holdings are hard to find, but analysts estimate its stockpile is relatively small, with most holdings in large countries such as Germany and France

However, analysts said China had no choice but to continue buying US debt in significant amounts for the time being.

"I'm sure they are looking into diversification but it's only going to be at the margins," IHS Global Insight analyst Alistair Thornton told AFP.

"In reality it is very hard for China to diversify away from buying US debt without fundamentally changing its whole economic model... no other market is as liquid as the US debt market."

Yin Zhentao, an economist with the Chinese Academy of Social Science, also said China had few other avenues.

"China's central bank has to mop up liquidity and the US Treasuries are the most important option," Yin told AFP.

Dagong, which has links to the government, said in a statement it had downgraded the United States' local and foreign currency credit rating from A+ to A, with a negative outlook.

Raising the US debt ceiling will "further deepen" the country's economic woes," said Dagong, adding that the "interest and safety" of creditors was not guaranteed.

Dagong has little financial muscle outside of China but has made a name for itself by accusing its three Western rivals -- Moody's, Fitch and Standard & Poor's -- of causing the financial crisis by not properly disclosing risk.

The big three agencies have consistently awarded Washington their highest possible ratings -- allowing the United States to take on more debt at lower cost, which China has blamed for fuelling inflationary pressures.

Dagong's chairman, Guan Jianzhong, is a paid adviser to China's government, but insists his agency is fully independent.

Graphic shows the debt ceiling vote in the House of Representatives and the US Senate.

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