China, South Korea react after US downgrade

According to Chinese economists, the US credit rating downgrade by Standard & Poor's poses great risk to financial markets and expects it to prompt China, the world's biggest holder of US Treasuries, to accelerate the diversification of its holdings.

The United States lost its AAA long-term credit rating from S&P on Friday.

S&P cut the rating to AA-plus on concerns over the government's budget deficits and rising debt burden. The move is likely to raise borrowing costs eventually for the US government, companies and consumers.

"There would be chaos in international financial markets at least in the short term. The most direct impact for China would be the hit on its reserves. The value of China's dollar investments will fall and the shrinking effect may be great," said Li Jie, a director at the Reserves Research Institute at the Central University of Finance and Economics.

Beijing has repeatedly urged Washington to protect its dollar investments, estimated by analysts to account for about two-thirds of its USD 3.2 trillion in foreign exchange reserves, the world's largest.

"China will be forced to consider other investments for its reserves. US Treasuries aren't as safe anymore. There is a class of assets out there that are more risky than AAA, but less risky than AA+. China didn't consider these investments before, but now it would be forced to do so," Li said.

Earlier this week, the United States narrowly avoided a default after lawmakers from across the political divide came together to hammer out a deal that would raise the country's borrowing authority after weeks of rancorous partisan battles.

S&P's downgrade may also push the United States to ease monetary policy further, causing even more uncertainty in global markets, said Ding Yifan, a deputy director at the Development Research Centre, a think tank under the State Council.

Reacting to the same news, a senior Bank of Korea official said on Saturday that he saw no major short term impact from a cut in the US credit rating by Standard and Poor's to AA-plus.

"Markets have already had a few scenarios on the US ratings and this was one of them, I think," head of the South Korean central bank's foreign exchange reserve management group, Hong Taeg-ki, told Reuters.

"An AA rating has no difference from AAA when it comes to the risk weighting of assets held by investors according to the Basel III guidelines and therefore there will be no big direct impact in the short run. And there is no alternative (to shift to)."

South Korea has the world's seventh largest foreign reserves and is a major investor in US Treasuries.