Asian Markets Rally on Debt Deal News

BEIJING, Aug. 1, 2011 -- Asian markets rallied this morning with the news that Washington may finally have a deal to avert a debt crisis. But for China, the U.S.'s largest creditor, it has been a nail-biting wait and while a doomsday scenario default has likely been avoided, many are asking whether the damage has already been done.

"The short answer is yes," Steven Xu, the director of the Economist Intelligence Unit in China, told ABC News.

"Given the unique status of U.S. dollar as the world's currency, it has been particularly disappointing to witness these [political] theatrics in the US. The government doesn't seem to even want to try in terms of belt-tightening. So that's particularly disappointing from China's perspective. And of course given the fact that China is biggest holder of U.S. treasuries, China has most to lose."

So far Chinese authorities here have not made any official comments about the debt stand-off, but Beijing has repeatedly urged Washington to protect its investments, which are estimated to account for roughly 70 percent of China's $3.2 trillion in foreign exchange reserves.

Last week, China's state-run Xinhua news agency ran a strongly worded editorial chastising "dangerously irresponsible" U.S. politics for having "kidnapped" the world's largest economy.

"It is arguably true that the ongoing tug of war in Washington is Uncle Sam's own business, as the United States has not yet defaulted on its debt," Xinhua said in remarks published on Thursday.

"However, the ugliest part of the saga is that the well-being of many other countries is also in the impact zone when the donkey and the elephant fight. It is time for Washington to revisit the time-tested common sense that one should live within one's means," it continued.

That sentiment was echoed across the blogosphere this morning, which was ablaze with discussion of the debt crisis.

One internet user, who goes by the moniker "calm at heart", wrote on Sina.com, "Nations that have U.S. treasury bonds are trapped. It's like a blood transfusion. If you don't do it, it will die and your debt assets will be washed away; but if you go on doing it, you'll be bogged down even further, and in the end your debt assets will still be washed away."

Another blogger,laobx88, wrote, "American Yankees, return the money you owe to the Chinese masses!"

For now, China has little option but to sit tight: any mass selling of their dollar denominated assets would further weaken the dollar, diminishing the value of their investments. But as Xu explained to ABC News, the Chinese now know they must start looking at other options.

"In the short term, other asset classes simply do not have the same liquidity to accommodate Chinese needs. But in the long term, China does have other choices. And in the medium term China has to starting looking elsewhere to avoid the consequence of passively investing in the US treasury market."

Many Chinese seem to agree.

"For the moment China can take a breath," one internet user posted, "but we must learn the lesson and think of ways to reduce the debt asset. We mustn't miss this opportunity."