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Even the United States once again solved its dispute at the last moment to end the government shutdown and the debt ceiling crisis. China still felt the panic deeply as the time tomb is still set to explode at any time.
Since China spends most of its foreign exchange reserves buying U.S. sovereign debts， the debt default of the U.S. will undoubtedly place China in the predicament.
According to the U.S. Treasury Department’s data， China now holds the sovereign debt of US$1.28 trillion in total. It has enough reasons to worry about the failure to pay the interest.
As the experts point out， China is hard to avoid the trap of US dollars. If the debt default happened， China has to face the risk of being unable to get the return and interest. And even when the debt ceiling crisis is successfully solved， China might not be optimistic for the long-term prospect.
The ceiling that has been touched
The rise of the debt ceiling crisis in the U.S. is being closely watched by the world. IMF president Christine Lagarde says that the U.S. needs to increase the US$16.7-trillion debt ceiling， which is the only and necessary way to solve the current problem. Otherwise the U.S. and even the global economy will be greatly damaged.
“As of the year of 1960， the U.S. sovereign debt ceiling has been increased 79 times， almost once every eight months，” says Zhang Monan， Deputy Director of National Information Center’s World Economy Research Office. In the past 10 years， the loans the U.S. government borrowed each year， including the refinancing of the debts， averagely amounted to over US$ 4 trillion. The total volume of U.S. governmental debts has already tripled from US$5.3 trillion to US$16.7 trillion at this moment， almost equal to its GDP.
The debt ceiling refers to the largest volume of debts a nation’s treasury department can borrow. Once the ceiling is hit， the repayment of the loans and interest will be affected unless massive tax collection and lowered welfare expenditure are taken. As experts say， the slow recovery of the global economy and the internal conflicts between the two parties of U.S. made it hard to take these measures. Meanwhile， the current political system of the U.S. determines that the debt ceiling crisis will come out regularly and periodically， which cannot be solved in a short while.
“Substantially， the U.S. government’s reliance on sovereign debts cannot be radically changed，” says Zhang Monan. “In the mid-1980s， the U.S. economy gradually turned into the one relying on the debts. The governmental budget deficit， the excessive consumption of the people and the financial support from the banks are everything of this system.
The world has paid enough attention to the U.S. debt ceiling crisis， especially China and Japan， which respectively holds US$1.28 trillion and US$1.14 trillion of U.S. governmental debts.
As the second largest holder of U.S. sovereign debts， Taro Aso， Minister of Finance of Japan， said that Japan needs to think carefully of the potential influence of the default of U.S. sovereign debts even though the U.S. is trying to keep it from happening.
China’s Vice Minister of Finance Zhu Guangyao said that China required the U.S. to take practical measures before October 17 to end the debate over the debt ceiling and stop the debt default for the safety of China’s investment into the U.S. “If the debt default really happens， the U.S. should guarantee the payment of interest of the sovereign debts first.”
“What the Ministry of Finance says means that no default happens if the in- terest can be paid， which could restart the circulation of the debt system，” says Fu Peng， chief macroeconomic consultant at Galaxy Securities. Recently， the CDS slightly increased in the world， meaning all sovereign debts around the globe are affected by the U.S. debt ceiling crisis. The U.S. governmental debts， which are the rudimentary debts in the world， will have negative influence over the debt market once its credit meets problems.
For China， if the debt default happens， the U.S. might not repay the debts and interest in time. On the other hand， if China sells the U.S. sovereign debts its holds to stop any further losses， the price will be cut down dramatically and the revenue of underselling cannot offset the loss caused by the lowered price.
The crisis temporarily avoided
Fortunately， the history tells us that no matter how furiously the Democrat and Republican debated over the upper limit of the sovereign debt， they would finally reach an agreement about higher debt ceiling.
In truth， the same thing happened in 2011 and ended with the two parties’ agreement to raise the debt ceiling. Looking further back， we can see that what worries people has never happed since it applied a ceiling over its total volume of sovereign debts in 1917.
“The U.S. dollar is the dominant currency of the global market and takes 80% of the world. The two parties will finally reach an agreement to raise the ceiling of U.S. sovereign debt，” says Tan Yaling， Dean of China Foreign Exchange Investment Research Institute. If the U.S. debt default really happens， that means the U.S. dollar is doomed， which Americans won’t let happen after 200 years of efforts. The incident of this time is like a replay of the history. On the evening of October 16， 2013， or to be more specifically， at 23 o’clock of that day， U.S.president Obama signed on the agreement just passed in the Senate and the House， which marked the end of the 16-day government shutdown. And the GOP made a compromise to postpone the expiration of debt ceiling to next February.
“The only possible reason for the occurence of the debt fault， if any， is the harsh economic situation，” says Xu Hongcai， director of the Information Office at China International Economic Communications Center. “But even the U.S. will not dare to raise the anger of the world by letting the default happen as the result is more than the breakdown of the currency system centered around the U.S. dollar. It can also lead to the collapse of the credit system of this country.”
The predicament of China
China sighed in relief at the 11th hour decision. But after wiping off the sweat， it has to resort to the fact that the crisis is far from gone. If the debt ceiling prolem is not solved next February， things could be even worse.
Even if next February still presents a happy ending， the crisis will be banished for just a while.
China once put forward the idea of multiplying its foreign exchange investment， such as increasing the categories of currencies and adding more products. However， as the experts have pointed out， most of the foreign exchange products are based on U.S. dollars， whose essence cannot be changed no matter how much adjustment is made.
Zhu Guangyao points out that China and the U.S.， the two largest economies in the world， share close economic ties. The annual trade volume between the two countries has already exceeded US$500 billion. The U.S. invested massively into China while China holds a large amount of U.S. sovereign debts.
But even such a close economic tie between China and the U.S. is not a reason for the excessive reliance of the China’s foreign exchange reserves on the U.S. dollar. As Zhang Monan says， countries with a large volume of USDbased assets and sovereign debts have to face the risk of the credit facility of U.S. dollars and the increasing volume of the sovereign debts.
“The U.S. dollar and U.S. sovereign debts have lost their long-term stability. The more debts the U.S. borrowed， the bigger impact it will bring to China， which holds the foreign exchange reserves of US$3.5 trillion. Therefore， China needs to have a long-tern viewpoint to prepare for the possible impact.”
The possible solutions include turning to euros or other strong international currencies， drive the internationalization of RMB and intensifying the acquisitions of energy and resources. Meanwhile， China hopes the U.S. to be more open， allowing Chinese investors to make more investment into this country.
Since China spends most of its foreign exchange reserves buying U.S. sovereign debts， the debt default of the U.S. will undoubtedly place China in the predicament.
According to the U.S. Treasury Department’s data， China now holds the sovereign debt of US$1.28 trillion in total. It has enough reasons to worry about the failure to pay the interest.
As the experts point out， China is hard to avoid the trap of US dollars. If the debt default happened， China has to face the risk of being unable to get the return and interest. And even when the debt ceiling crisis is successfully solved， China might not be optimistic for the long-term prospect.
The ceiling that has been touched
The rise of the debt ceiling crisis in the U.S. is being closely watched by the world. IMF president Christine Lagarde says that the U.S. needs to increase the US$16.7-trillion debt ceiling， which is the only and necessary way to solve the current problem. Otherwise the U.S. and even the global economy will be greatly damaged.
“As of the year of 1960， the U.S. sovereign debt ceiling has been increased 79 times， almost once every eight months，” says Zhang Monan， Deputy Director of National Information Center’s World Economy Research Office. In the past 10 years， the loans the U.S. government borrowed each year， including the refinancing of the debts， averagely amounted to over US$ 4 trillion. The total volume of U.S. governmental debts has already tripled from US$5.3 trillion to US$16.7 trillion at this moment， almost equal to its GDP.
The debt ceiling refers to the largest volume of debts a nation’s treasury department can borrow. Once the ceiling is hit， the repayment of the loans and interest will be affected unless massive tax collection and lowered welfare expenditure are taken. As experts say， the slow recovery of the global economy and the internal conflicts between the two parties of U.S. made it hard to take these measures. Meanwhile， the current political system of the U.S. determines that the debt ceiling crisis will come out regularly and periodically， which cannot be solved in a short while.
“Substantially， the U.S. government’s reliance on sovereign debts cannot be radically changed，” says Zhang Monan. “In the mid-1980s， the U.S. economy gradually turned into the one relying on the debts. The governmental budget deficit， the excessive consumption of the people and the financial support from the banks are everything of this system.
The world has paid enough attention to the U.S. debt ceiling crisis， especially China and Japan， which respectively holds US$1.28 trillion and US$1.14 trillion of U.S. governmental debts.
As the second largest holder of U.S. sovereign debts， Taro Aso， Minister of Finance of Japan， said that Japan needs to think carefully of the potential influence of the default of U.S. sovereign debts even though the U.S. is trying to keep it from happening.
China’s Vice Minister of Finance Zhu Guangyao said that China required the U.S. to take practical measures before October 17 to end the debate over the debt ceiling and stop the debt default for the safety of China’s investment into the U.S. “If the debt default really happens， the U.S. should guarantee the payment of interest of the sovereign debts first.”
“What the Ministry of Finance says means that no default happens if the in- terest can be paid， which could restart the circulation of the debt system，” says Fu Peng， chief macroeconomic consultant at Galaxy Securities. Recently， the CDS slightly increased in the world， meaning all sovereign debts around the globe are affected by the U.S. debt ceiling crisis. The U.S. governmental debts， which are the rudimentary debts in the world， will have negative influence over the debt market once its credit meets problems.
For China， if the debt default happens， the U.S. might not repay the debts and interest in time. On the other hand， if China sells the U.S. sovereign debts its holds to stop any further losses， the price will be cut down dramatically and the revenue of underselling cannot offset the loss caused by the lowered price.
The crisis temporarily avoided
Fortunately， the history tells us that no matter how furiously the Democrat and Republican debated over the upper limit of the sovereign debt， they would finally reach an agreement about higher debt ceiling.
In truth， the same thing happened in 2011 and ended with the two parties’ agreement to raise the debt ceiling. Looking further back， we can see that what worries people has never happed since it applied a ceiling over its total volume of sovereign debts in 1917.
“The U.S. dollar is the dominant currency of the global market and takes 80% of the world. The two parties will finally reach an agreement to raise the ceiling of U.S. sovereign debt，” says Tan Yaling， Dean of China Foreign Exchange Investment Research Institute. If the U.S. debt default really happens， that means the U.S. dollar is doomed， which Americans won’t let happen after 200 years of efforts. The incident of this time is like a replay of the history. On the evening of October 16， 2013， or to be more specifically， at 23 o’clock of that day， U.S.president Obama signed on the agreement just passed in the Senate and the House， which marked the end of the 16-day government shutdown. And the GOP made a compromise to postpone the expiration of debt ceiling to next February.
“The only possible reason for the occurence of the debt fault， if any， is the harsh economic situation，” says Xu Hongcai， director of the Information Office at China International Economic Communications Center. “But even the U.S. will not dare to raise the anger of the world by letting the default happen as the result is more than the breakdown of the currency system centered around the U.S. dollar. It can also lead to the collapse of the credit system of this country.”
The predicament of China
China sighed in relief at the 11th hour decision. But after wiping off the sweat， it has to resort to the fact that the crisis is far from gone. If the debt ceiling prolem is not solved next February， things could be even worse.
Even if next February still presents a happy ending， the crisis will be banished for just a while.
China once put forward the idea of multiplying its foreign exchange investment， such as increasing the categories of currencies and adding more products. However， as the experts have pointed out， most of the foreign exchange products are based on U.S. dollars， whose essence cannot be changed no matter how much adjustment is made.
Zhu Guangyao points out that China and the U.S.， the two largest economies in the world， share close economic ties. The annual trade volume between the two countries has already exceeded US$500 billion. The U.S. invested massively into China while China holds a large amount of U.S. sovereign debts.
But even such a close economic tie between China and the U.S. is not a reason for the excessive reliance of the China’s foreign exchange reserves on the U.S. dollar. As Zhang Monan says， countries with a large volume of USDbased assets and sovereign debts have to face the risk of the credit facility of U.S. dollars and the increasing volume of the sovereign debts.
“The U.S. dollar and U.S. sovereign debts have lost their long-term stability. The more debts the U.S. borrowed， the bigger impact it will bring to China， which holds the foreign exchange reserves of US$3.5 trillion. Therefore， China needs to have a long-tern viewpoint to prepare for the possible impact.”
The possible solutions include turning to euros or other strong international currencies， drive the internationalization of RMB and intensifying the acquisitions of energy and resources. Meanwhile， China hopes the U.S. to be more open， allowing Chinese investors to make more investment into this country.