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US Debt Debate Displays China’s Economic Fears, Ambitions


FILE - US Hundred dollar notes.

FILE - US Hundred dollar notes.

While lawmakers in Washington near the deadline that could see the United States default on its debt, the standoff has provoked stern responses from China. The warnings from officials and shrill commentaries in state-backed media have revealed how much the two countries are economically connected - for better or worse.

Leaders in China can do little but worry and wait to see if the debt debate in Washington comes to a resolution before Thursday’s deadline, when the government technically begins defaulting on payments to its creditors.

State-backed media have been busy using the debt debate as a chance to find fault in America’s democratic political system, which authorities view as inherently handicapped by legislative gridlock, putting at risk the global economic system.

Conspiracy theory

One recent commentary in China’s Guoji Xianqu Daobao warned the United States is about to throw “an economic nuclear bomb,” depressing stock markets until the impasse is resolved.

Another in the Shijie Xinwen Bao cried conspiracy, arguing the government shutdown was just a “Ponzi scheme” directed by Washington to maintain its role as a global financial leader.

The commentary that has attracted the most attention, however, is an opinion piece by state-run news agency Xinhua, calling for a new world economic system that is “de-Americanized.” Despite drawing broad attention overseas, it has had less impact at home and was not published in Chinese.

The article calls for the establishment of a new international currency reserve to replace the one dominated by the U.S. dollar.

Jeffrey Bader, former national security adviser to President Barack Obama says that if Xinhua is saying the situation is horrible, he agrees. He says it is a disgraceful episode in American history, but that markets will determine the fate of the U.S. currency, just as they always have.

“It's not going to be determined by a fiat from Washington or the next chairman of the Federal Reserve announcing that we are going to remain the global currency. Markets everywhere will determine it," he said. "If Zhou Xiaochuan [the head of the People’s Bank of China] or SAFE [State Administration of Foreign Exchange] decided tomorrow that 1.3 trillion in dollars in U.S. treasuries is still risking too much, they would look for alternatives.”

Like many other countries, a large batch of China's $3.66 trillion in foreign currency reserves are held in the low-yield U.S. dollar Treasury bonds, long considered a safe investment with little risk.

That stability has been the main reason that the dollar remains the centerpiece of the global financial system, as a currency countries purchase and hold as a safe asset.

Looking for options

In recent years, China has slowed its purchase of Treasuries, but it has few other options for storing the surpluses from its export-driven economy.

Financial instability in Europe has hurt the attractiveness of the Euro. And China does not yet allow its own currency to be freely traded across its borders, meaning it cannot become an international reserve.

But Bader said China is taking steps to turn the renminbi or RMB, into a major currency.

“Already many countries with whom China has agreements for settlements of transactions with RMB. Just announced with Australia recently, with New Zealand and a lot of places in Southeast Asia. But China is still quite some distance away from the RMB becoming a significant reserve currency and China is probably not anxious to move in that direction, too,” said Bader.

Even so, China is making efforts to move in that direction. This week, it cleared Britain to join Hong Kong and Taiwan in a program that allows offshore RMB to be invested in Chinese securities.

Soon, investors in London will be able to buy up Chinese bonds, stocks and other market instruments.

Potential downgrade impact

As the debate in Washington pushes into its final hours, U.S.-debt rating company Fitch Ratings says it is reviewing the U.S. government’s AAA status.

For China, a downgrade could wipe out some of their $1.28 trillion in U.S. Treasury holdings.

Jin Canrong, a political scientist at Beijing’s Renmin University, said that could have serious implications domestically.

“That’s the biggest concern right now, nothing else," Jin Canrong said. He added he doesn’t see any big changes and doesn’t believe the situation will have an impact on U.S. standing in the world. Hence, he said, China still needs to work together with America.

David Dollar, a senior fellow at the Brookings Institution in Washington D.C., said that although the debt debate risks hurting U.S. stature in Asia, the impact is likely to be small.

“I think there is a gradual shift going on where China’s size in the world economy is growing and China’s influence is growing, but that’s a very gradual process,” he said.

The debt standoff in Washington forced President Barack Obama to cancel a trip to key Asian economic and political meetings earlier this month. At a time when the Obama administration has been trying to boost Asian diplomatic and security ties, China has been playing up its own role.

The state-backed Beijing Youth Daily summed up the Chinese view by quoting the proverb, a “good neighbor, is better than a brother far off.”

VOA's Ira Mellman also contributed to this report.

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