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

China Investigates Former Powerful Security Chief

Former security chief and member of Politburo Standing Committee, Zhou Yongkang, under investigation for suspected 'serious disciplinary violation' More

India, US Look to Reset Ties During Kerry Visit

This week's talks will be first high level interaction between two countries since Prime Minister Narendra Modi took charge More

Video Young African Leadership Program Renamed to Honor Mandela

YALI program, launched by President Obama in 2010, aims to build skills in business, entrepreneurship, public management and civic leadership More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Vietnamese Staging Chinese Product Boycott After Oil Rig Spati
X
Reasey Poch
July 28, 2014 7:18 PM
China recently pulled an oil rig from an area of the disputed South China Sea that Vietnam also claims. Despite the action, the incident has had a lingering effect on consumers in Vietnam. VOA's Reasey Poch reports from Hanoi on an effort to boycott Chinese products.
Video

Video Vietnamese Staging Chinese Product Boycott After Oil Rig Spat

China recently pulled an oil rig from an area of the disputed South China Sea that Vietnam also claims. Despite the action, the incident has had a lingering effect on consumers in Vietnam. VOA's Reasey Poch reports from Hanoi on an effort to boycott Chinese products.
Video

Video ESA Spacecraft to Land on a Comet

After a long flight through deep space, a European Space Agency probe is finally approaching its target -- a comet millions of kilometers away from earth. Scientists say the mission may lead to some startling discoveries about the origins of the water on earth. VOA’s George Putic has more.
Video

Video Young Africans Arrive in US for Leadership Program

President Barack Obama's Young African Leadership Initiative has brought hundreds of young Africans to the United States for a six-week program aimed at building their knowledge and skills in fields such as public administration and business. Out of the 50,000 young Africans who applied for the program, just one percent was accepted. VOA's Laurel Bowman caught up with some of those who made the cut and has this report.
Video

Video In Honduras, Amnesty Rumors Fuel US Migration Surges

False rumors in Central America are fueling the current surge of undocumented young people being apprehended at the U.S. border. The inaccurate claims suggest the U.S. will give amnesty to young migrants from the region. As VOA's Brian Padden reports from Honduras, these rumors trace back to President Obama's 2012 executive order to halt deportations for some young undocumented immigrants already living in the United States.
Video

Video Students in Business for Themselves

They're only high school students, but they are making accessories for shoes, fabricating backpacks and doing product photography - all through their own businesses. It's the result of a partnership between a non-profit organization that teaches entrepreneurship and their schools. VOA's Mike O'Sullivan and Deyane Moses met the budding entrepreneurs near Los Angeles.
Video

Video Astronauts Train in Underwater Lab

In the world’s only underwater laboratory, four U.S. astronauts train for a planned visit to an asteroid. The lab - called Aquarius- is located five kilometers off Key Largo, in southern Florida. Living in close quarters and making excursions only into the surrounding ocean, they try to simulate the daily routine of a crew that will someday travel to collect samples of a rock orbiting far away from earth. VOA’s George Putic has more.

AppleAndroid

World Currencies

EUR
USD
0.7305
JPY
USD
101.53
GBP
USD
0.5830
CAD
USD
1.0656
INR
USD
60.075

Rates may not be current.