News / Economy

As US Averts Default, Japan, China Brace for Next Dollar Drama

A man holding a mobile phone is reflected in an electronic board displaying foreign currency rates against the Japanese yen and market indices from around the world outside a brokerage in Tokyo, Oct. 11, 2013.
A man holding a mobile phone is reflected in an electronic board displaying foreign currency rates against the Japanese yen and market indices from around the world outside a brokerage in Tokyo, Oct. 11, 2013.
Reuters
Deal or no deal, the U.S. Congress' dance with default impressed policymakers and investors in China and Japan with just how vulnerable their own economic revival plans are to the next political tantrum on Capitol Hill.
 
The 11th-hour agreement on Wednesday between Congressional Republicans and Democrats to raise the limit on U.S. government borrowing and end a 16-day government shutdown also averted a default on U.S. Treasury bonds that had threatened the global economy and financial system.
 
But Congress gets another chance to hold U.S. creditworthiness hostage early next year ahead of a new February 7 deadline to approve a debt ceiling increase.
 
“We're glad a deal has been struck,” said a Japanese policymaker, who spoke on condition of anonymity. “But the uncertainty will remain and it will be the same thing all over again early next year.”
 
He and other Japanese officials say they have already developed contingency plans that include flooding Japan's banking system with cash to keep markets functioning however panicked investors become. And analysts say China, whose Communist leaders are due to hold a key policy meeting next month, may step up a push for global acceptance of its currency, the yuan or renminbi, as an alternative to the U.S. dollar in international trade.
 
“They might actually consider accelerating the process,” said Vincent Chan, head of equity research at Credit Suisse in Hong Kong. “You strengthen the case of making the renminbi a genuine international currency, because the Americans are unreliable.

Near-debt experience
 
Perhaps no two economies outside the United States have more at stake in Washington's recurring drama than Japan and China.
 
Not only are they the second- and third-largest economies, but they lend Washington more money than any other single nation. China held $1.28 trillion in U.S. Treasury securities at the end of July and Japan owned $1.14 trillion. A default would likely have devastated the value of their holdings.
 
More than that, though, both nations have adopted policies to revitalize their own economies that to some extent rely on the improving economic appetite, stable currency and increasing indebtedness of the world's largest economy.
 
China is trying to deflate a dangerous credit bubble and wealth imbalances with a series of reforms that include slowly easing controls on moving money into and out of the country and allowing its currency to gently appreciate.
 
Analysts predict investors faced with a U.S. default would try to sell dollars for yuan, forcing China's central bank to either buy up dollars at a time when the government issuing them isn't honoring its obligations or allow a rapid increase in the yuan's value that would hurt exports and worsen the country's credit bubble.
 
In a sign of such market pressure, the yuan hit a record high on Friday for a fifth consecutive day against the dollar, partly as investors worried about the economic impact of the U.S. shutdown.
 
“If China allows the yuan to rise sharply, it could be very risky given the possible asset bubbles in the country,” said He Yifeng, an economist at Hongyuan Securities in Beijing.
 
Japan, meanwhile, is trying to end 20 years of deflation and anemic growth with a blend of policies named for their chief proponent, Prime Minister Shinzo Abe. “Abenomics” relies on reviving domestic consumption and investment in part by weakening the yen, boosting the earnings and stock prices of giant exporters like Toyota Motors Corp and Hitachi Ltd .
 
A U.S. default would likely prompt investors to buy yen.
 
“That would undoubtedly pose a headwind against Abenomics, which has much depended on a weak yen and higher share prices buoyed by the feel-good mood it has generated,” said Masamichi Adachi, senior economist at JPMorgan Securities in Tokyo.

Quid pro quo
 
A default also stands to hamper a U.S. recovery and with it a nascent rebound in global exports. A default in the first quarter of 2014 would hit just as Japan's economy girds for an April sales tax increase and as China's economy loses the effects of accelerated public works spending and re-stocking of inventories.
 
There are no bond markets large enough to give China and Japan an alternative to U.S. Treasuries for the dollars they accumulate selling exports. So the prospect of another U.S. default drama next year is likely to lend new urgency to China's preferred solution: conducting less trade in dollars and more in renminbi.
 
About 18 percent of China's total trade is settled in yuan and it has registered a sharp increase this year after stagnating for most of last year.
 
Much of the increase has come in China's trade with economies outside the United States or the European Union, its biggest demand centers, although it accelerated plans to internationalize the currency with agreements this month with Britain and the European Central Bank.
 
Achieving more trade in yuan, however, means giving China's trading partners a place to invest their renminbi as easily as they invest their dollars in U.S. Treasuries now.
 
That means opening China further to foreign investment, a realization that could strengthen the hand of officials advocating faster reform.
 
“China can only be strong when its currency is a real alternative,” said Chan at Credit Suisse. “But to be an alternative you have to have an open market.”

You May Like

Video Indiana Controversy Points to Divergent Notions of Religious Freedom

Gay-marriage opponents are looking for ways to maintain their beliefs in face of changing culture, one writer says More

UNICEF Denies North Korean Measles Outbreak

Agency dismisses Russian media report after government, WHO assurances More

Turkey Seen Taking Harder Stance Against Militant Kurds

Stance comes as President Recep Tayyip Erdogan is being seen as moving closer to generals More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Indiana Controversy Highlights Divergent Meanings of Religious Freedomi
X
Jerome Socolovsky
April 01, 2015 1:41 AM
Indiana’s state government has triggered a nationwide controversy by approving a law that critics say is aimed at allowing discrimination against gays and lesbians. The controversy stems from divergent notions of religious freedom in America. VOA's Jerome Socolovsky reports.
Video

Video Indiana Controversy Highlights Divergent Meanings of Religious Freedom

Indiana’s state government has triggered a nationwide controversy by approving a law that critics say is aimed at allowing discrimination against gays and lesbians. The controversy stems from divergent notions of religious freedom in America. VOA's Jerome Socolovsky reports.
Video

Video Nigerians Welcome Buhari's Return to Power

Crowds of jubilant Nigerians nationwide have celebrated the return to power of former military ruler Muhammadu Buhari. The retired army general won this year's presidential election with more than 2 million votes more than incumbent President Goodluck Jonathan. Buhari's supporters hope he can strengthen the country's economy and security once he takes office in late May. Zlatica Hoke has this story.
Video

Video Report: State of Black America a 'Tale of Two Nations'

The National Urban League has described this year's "State of Black America" report as a "tale of two nations." The group's annual report, released earlier this month (March), found that under an equality index African Americans had only 72% parity compared to whites in areas such as education, economics, health, social justice and civic engagement. It’s a gap that educators and students at Brooklyn’s Medgar Evers College are looking to close. VOA's Daniela Schrier reports from the school.
Video

Video Film Tells Story of Musicians in Mali Threatened by Jihadists

At this year's annual South by Southwest film and music festival in Austin, Texas, some musicians from Mali were on hand to promote a film about how their lives were upturned by jihadists who destroyed ancient treasures in the city of Timbuktu and prohibited anyone from playing music under threat of death. As VOA’s Greg Flakus reports from Austin, some are afraid to return to their hometowns even though the jihadists are no longer in control there.
Video

Video Gamma Ray Observatory to Open Soon in Mexico

American and Mexican scientists have completed construction of the world's largest gamma ray observatory, situated high in central Mexico’s Sierra Negra Mountain. The observatory's huge array of water-based detectors will soon start discovering secrets about black holes and supernovas. VOA’s George Putic reports.
Video

Video Ebola Vaccine Trials Underway in West Africa

Ebola has claimed the lives of more than 10,000 people in West Africa. Since last summer, researchers have rushed to get anti-Ebola vaccines into clinical trials. While it's too early to say that any of the potential vaccines work, some scientists say they are seeing strong results from some of the studies. VOA's Carol Pearson reports.
Video

Video Philippines Wants Tourists Spending Money at New Casinos

Tourism is a multi-billion dollar industry in the Philippines. Close to five million foreign visitors traveled there last year, perhaps lured by the country’s tropical beaches. But Jason Strother reports from Manila that the country hopes to entice more travelers to stay indoors and spend money inside new casinos.
Video

Video Civilian Casualties Push Men to Join Rebels in Ukraine

The continued fighting in eastern Ukraine and the shelling of civilian neighborhoods seem to be pushing more men to join the separatist fighters. Many of the new recruits are residents of Ukraine made bitter by new grievances, as well as old. VOA's Patrick Wells reports.
Video

Video Islamic State Prisoners Talk of Curiosity, God, Regret

Islamic State fighter, a prisoner of Kurdish YPG forces, asked his family asking for forgiveness: "I destroyed myself and I destroyed them along with me." The Syrian youth was one of two detainees who spoke to VOA’s Kurdish Service about the path they chose; their names have been changed and identifying details obscured. VOA's Zana Omer reports.
Video

Video Germanwings Findings Raise Issue of Psychological Testing for Pilots

More is being discovered about the co-pilot in the crash of Germanwings Flight 9525 in the French Alps. Investigators say he was hiding a medical condition, raising questions about the mental qualifications of pilots. VOA's Carolyn Presutti reports.
Video

Video Liberia's Almost Last Ebola Patient Grateful but Still Grieving

Beatrice Yardolo was to make history as Liberia’s last Ebola patient. Liberians recently started counting down 42 days, the period that has to go by without a single new infection until the World Health Organization can declare a country Ebola-free. That countdown stopped on March 20 when there was another new case of Ebola, making Yardolo’s story a reminder that Ebola is far from over. Benno Muchler reports from Monrovia.
Video

Video Cambodian Land Grabs Threaten Traditional Communities

Indigenous communities in Cambodia's Ratanakiri province say the government’s economic land concession policy is taking away their land and traditional way of life, making many fear that their identity will soon be lost. Local authorities, though, have denied this is the case. VOA's Say Mony went to investigate and filed this report, narrated by Colin Lovett.

VOA Blogs

Circumventing Censorship

An Internet Primer for Healthy Web Habits

As surveillance and censoring technologies advance, so, too, do new tools for your computer or mobile device that help protect your privacy and break through Internet censorship.
More

World Currencies

EUR
USD
0.9220
JPY
USD
119.88
GBP
USD
0.6757
CAD
USD
1.2640
INR
USD
62.626

Rates may not be current.