“If the unemployment rate continues to rise, it will further damage investor confidence and force them to move away from U.S. Treasury securities, leaving the U.S. government no choice but to print money and depreciate its currency.”-Lu Zhengwei, Industrial Bank Co Ltd

Chinese officials say the U.S. Debt Limit Deal is not enough, mainly because it will not stop job loses, and it doesn’t cut enough government spending.

Zhu Baoliang, chief economist at the State Information Center, says U.S. government debt is too large to be resolved through normal measures such as tax increases and deficit reductions.  Also, it is highly unlikely the U.S. government will significantly reduce entitlements like Social Security and Medicare, or significantly draw down troops overseas.  All that means is at the very least the U.S. dollar will continue to lose value.

The Chinese are blaming their runaway inflation on the falling U.S. dollar.  In June inflation hit 6.4% in China.  The increase in costs is causing a drop in factory orders, which hits China where it hurts.

Chen Kexin, chief analyst at the Distribution Productivity Promotion Center of China Commerce, says no matter what happens now, inflation will pick up speed.  He predicts oil prices will go back up to more than $100.00 per barrel, and copper could hit $10,000 per ton.

According to the U.S. Department of the Treasury, China is the largest foreign holder of U.S. government debt (the overall largest holder of U.S. debt is…the U.S. taxpayer via the U.S. Treasury).  Many analysts in the United States think China has no choice but to keep buying U.S. debt, creating a false sense of security among U.S. leaders.  But one analysts admits China is cutting back: “Beijing is probably not buying Treasuries as intensely as it did last year.”-Derek Scissors, The Heritage Foundation

Chinese analysts are pushing for their government to diversify their U.S. debt holdings, because the debt limit deal won’t help: “The debt crisis may have a negative impact on the fiscal spending of the U.S. government, which may drag down the U.S. economy for the rest of the year.”-Hou Zhenhai, Investment bank China International Capital Corp

It’s not just U.S. government bonds China has, but something called foreign exchange reserves.  These bonds can come from corporations, like Fannie Mae and Freddie Mac.  The problem for China is most of its foreign exchange reserves are in U.S. dollars.  Chinese analysts are warning of the “all your eggs in one basket” scenario; they think China will be dragged down when the United States finally sinks.

In fact, one analysts thinks the situation is so bad that China should stop investing into all foreign operations: “Because of the lack of mature overseas investment projects, the scale of China’s overseas investment is not big enough to absorb massive foreign exchange reserves in the short term. Therefore, to invest overseas is not realistic.”-Zhang Yi, Institute of Foreign Economy, the National Development and Reform Commission