UK

China Suggests Time Is Right For New Global Reserve Currency

06/08/2011 15:04 BST | Updated 06/10/2011 10:12 BST

China has said that the United States is placing the world economy at risk through its "addiction" to debt, and has called on the country to cut defence and welfare costs.

The statement was made via a commentary on Chinese state media in response to the downgrading of the US credit rating by the agency Standard & Poor's.

Published by the Xinhau News Agency, the commentary predicted that there would be more "devastating" credit rating downgrades to come that could place the entire world economy at risk.

The commentary added that a new global reserve currency might be needed to overcome the current crisis. It also called for "international supervision" of the US dollar.

China currently holds around $1.2 trillion of US debt.

"The US government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone," the commentary said, according to The Telegraph.

The unprecedented downgrading of the US debt rating from AAA to AA+ came a week after Congress agreed to raise the country's debt ceiling and cut spending by more than $2 trillion.

The cuts were not enough for Standard & Poor's, who had flagged up the possible downgrade as early as April.

Moody's, another credit agency, said that the US would keep its AAA rating but that it would continue to reassess the situation.

There are now concerns that markets will react badly after two days of sell offs on the markets in Europe and the US.

"I think we will have a knee-jerk reaction on Monday," Jack Ablin, chief investment officer at Harris Private Bank, told the Press Association.

Earlier, Business Secretary Vince Cable said that the UK was in a relatively strong position to cope with the crisis in both America and Europe.

"Financial markets are now focusing on the credit-worthiness of governments," Cable told Sky News. "Three years ago, it was on the banks and banks' stability. Now it is on government debt.

"That's why the UK is in a fairly good position. I think the markets perceive that we have got a stable Government... and we have got on top of the deficit problem and have got a clear programme to deal with it."