The downgrade of  U.S. government debt has shaken investor belief in U.S. government bonds as a risk-free investment option. Now investors are looking for alternative places to avoid risks.

The Shanghai Composite Index plunged to 2,497.92 on Monday, the lowest record this year, following rating agency Standard & Poor's downgrade of U.S. government debt from AAA to AA+ last Friday.

The downgrade has shaken investor belief in U.S. government bonds as a risk-free investment option. Now investors are looking for alternative places to avoid risks. The expectation for RMB appreciation and an optimistic ecnomic outlook in China have made the country the most popular alternative.

"The downgrade will result in more hot money inflows into China," said Chen Gong, chief researcher of Anbound Group, a Beijing-based consulting firm.

The yuan's ratio to the U.S. dollar has been rising since China launched exchange rate reforms in June 2010. The expectation for RMB appreciation has become one of the most important reasons for capital inflows, said Lian Ping, chief economist at the Bank of Communications.

The U.S. is likely to launch a third round of quantitative easing, which will further devalue the dollar and put China's large amount of foreign exchange reserves at risk, said He Qingming, a researcher at Ping An Securities.

Chen agreed: "China's foreign-exchange reserves have hit US$1.16 trillion. The downgrade possibly means China will suffer losses of $6 billion to $7 billion."