20110119 hujintao obama china 35
US President Barack Obama stands with Chinese President Hu Jintao(L) during a State Arrival ceremony on the South Lawn of the White House in Washington, DC, January 19, 2011. Hu said Wednesday he could see 'new progress' in his country's ties to the United States as he was welcomed to the White House by US leader Barack Obama. 'Since President Obama took office with concerted efforts of the two sides, our cooperation in various fields has produced fruitful results and our relations have achieved new progress,' Hu said. - 

STEVE CHIOTAKIS: China, of course, is the biggest holder of U.S. debt, outside of the Federal Reserve. And it's had a full weekend to react to the downgrade. And react it did. Marketplace's China Bureau Chief Rob Schmitz is on the line with us from Shanghai to discuss this. Hey, Rob.

ROB SCHMITZ: Hey, Steve.

CHIOTAKIS: How has China reacted to this downgrade?

SCHMITZ: Well, it's had some pretty tough words for the U.S. The state-run press ran an editorial this weekend that said "the good old days" of the U.S. borrowing itself out of trouble are over. But that's really just rhetoric. The government is posturing for its own domestic audience. China's the biggest foreign holder of U.S. debt, but it's not gonna dump that debt. China buys U.S. treasury bonds in order to keep its currency artificially low. That, in turn, keeps its exports cheap and keeps people employed. This is the circle that binds the U.S. and China together: China buys our debt so it can export goods to us, and we keep borrowing money from China so we can afford all those goods.

CHIOTAKIS: Rob, I know Asian markets plummeted today, as we said at the outset of the show. How much of that was about the downgrade?

SCHMITZ: I talked to a few economists about this today, and the consensus seemed to be: not as much as you might think. There's a lot of other things Asian investors are worried about, including the European debt crisis and unemployment numbers from the U.S. I spoke with economist Arthur Kroeber about this today and here's what he said.

ARTHUR KROEBER: The U.S. downgrade among those pieces of information is probably ranked, like, 30th or 40th behind the latest U.S, economic data, which was pretty unpleasant, and what's coming out of Europe.

SCHMITZ: So it's not the downgrading, per se, it's what the downgrading represents that Asian markets seem to be responding to.

CHIOTAKIS: Marketplace's China Bureau Chief, Rob Schmitz joining us from Shanghai. Rob, thanks.

SCHMITZ: Thanks, Steve.