The Standard Poor’s rating agency announced on August 5 that it has downgraded the U.S. credit rating to AA+ from its top rank of AAA for first time. In response to SP’s move， Asian and Oceania markets saw intense volatility on August 8 as major stock markets in Australia， New Zealand， Japan， South Korea， Singapore， Mainland China， Taiwan and Hong Kong encountered plunging， causing increasing fears and worries over a global recession. China’s benchmark Shanghai Composite Index led Monday’s fall by diving to one-year low.

Impacted by the downgrade， the U.S. dollar also fell lower against major currencies like euro and British pound and as smart money looks for safe havens， traditionally gold， the price of the yellow metal set record high on flight-tosafety buying.

Analysts in Beijing pointed out that， in the short term， the international financial turmoil， triggered by U.S. credit-rating cut， seems to have a relatively modest impact on China’s real economy; however， in the long run， with the debt crisis in Europe and the United States worsening and world economy likely to slide back into a recession， China’s economy is open to a heavy blow.

Professor Zhao Xijun， vice president of the School of Finance at China Renmin University， told reporters that， the performance of China’s stock market in nature is influenced by such internal factors as the nation’s economic fundamentals， listed companies’ operations and government’s macroeconomic policies; the real impact of external factors at this stage is psychological.

Zhao said， the downgrading of U.S. credit rating， which has brought a severe market tumult， reflects investors’ pessimism over the outlook of the world’s largest economy and reduced confidence in the government’s ability to make economic policies and manage its finances.

Signs of US economy relapsing into a recession have long worried investors. US stocks plummeted in the heaviest volume since 2008 crisis and saw no gyration. As the stock futures also tumbled the market was more clouded.

Tan Yaling， head of China Forex Investment Research Institute， said that the slump in the Asian stock market was more of a knee-jerk reaction to the U.S. stock crash last week.

According to the recently released figures， the US economy stalled as gross domestic product， the broadest measure of the nation’s economic health， rose at a meager rate of 1.3% in the second quarter. While that’s an increase from the revised 0.4% growth rate in the first three months of the year， it is hardly good news. US ISM manufacturing index fell sharply in July to 50.9. In particular， the crucial New Orders component dropped to the lowest point since June 2009.

Goldman Sachs now estimates that the probability of a renewed recession in the US is around one third. Martin Feldstein， former president of the National Bureau of Economic Research and currently member of the Business Cycle Dating

Committee of NBER， sees 50% chance of US economy heading into another recession.

Following the credit rating cut， weak economic rebound and deteriorating financial turmoil， it looks like “QE3” (quantitative easing policy) by US government could be on the way. This has sparked wide concerns over the world economy as the QE3 would lead to continuous depreciation of the US dollar， great shrinkage of the dollar assets， as well as surge of major international commodity prices.

As reviewed by Prof. Zhao， the drop in the US sovereign credit rating by one notch to AA+ has raised the potential risks for Chinese foreign investment， particularly risks of fluctuations in the prices and yields of US Treasury bonds and“unavoidable” defaults.

The total volume of China’s foreign exchange reserves has topped US$3.2 trillion. Among these， about two-thirds are dollardenominated assets， including the purchasing of US$1.15 trillion U.S. national debt (about half of U.S. dollar foreign exchange reserves)， and the rest are mainly institutional bonds and stocks.

Zhao said， China should further diversify the allocation of its reserves to hedge against potential risks. In order to fend off U.S. defaults on debt， China， the largest US creditor， and other foreign holders of US Treasuries should take action and press Congress and the administration to bear the responsibility of debtor countries and safeguard their dollar assets.

The decision by Standard Poor’s to strip Washington of its top triple-A rating has served as a wake-up call for US politicians. It sends a clear message that Democrats and Republicans must put aside partisanship and work together to establish a stable and predictable market for investors， otherwise the political crisis the two sides has ignited will surely lead to wide-spreading economic and social turbulence.

Due to a lack of high yield safe investments tools， the US Treasuries is still considered the largest and safest haven in the world.

According to Tan， in terms of liquidity and market depth， now the US Treasury bonds and other bonds backed by US federal reserves are still unparalleled by other investments， whether it is gold or bonds issued by triple-A corporations or nations. Therefore， under current circumstances， China doesn’t have many options besides continuing to purchase US Treasury bonds with dollars.

In response to the sudden downgrading of U.S. credit rating， finance ministers from the G7 leading industrial countries agreed to a series of urgent weekend telephone talks to try to prevent a loss of confidence in the world’s biggest economy and ensure financial stability.

However， Tan also warned that such a move may lead to a high global liquidity glut， thus wreaking havoc with the world’s economy. U.S. will seek larger global share through the depreciation of its currency and sell treasuries， while developing countries with relatively volatile and unstable economic systems are likely to suffer a loss of wealth.

She stressed that China should diversify its foreign exchange reserves not only by increasing the proportion of non-dollar assets but also by seeking alternative ways to invest these reserves.

(Authors: from Xinhuenet)