As the U.S. government begins its second week on shutdown, Beijing has urged Washington to avoid a debt crisis and protect Chinese investments. Reuters reports:
China, the U.S. government’s largest creditor, is “naturally concerned about developments in the U.S. fiscal cliff”, Vice Finance Minister Zhu Guangyao said in the Chinese government’s first public response to the Oct 17 deadline in the United States for raising the debt ceiling.
“We ask that the United States earnestly takes steps to resolve in a timely way before October 17 the political (issues) around the debt ceiling and prevent a U.S. debt default to ensure safety of Chinese investments in the United States and the global economic recovery,” Zhu said.
“This is the United States’ responsibility.” [Source]
The Wall Street Journal has more on the global implications of a U.S. default and China’s interest in preventing it, noting that since the last time the U.S. was in a debt ceiling standoff, China has been edging away from U.S. instruments of investment:
Noting that China is a major holder of U.S. Treasurys, Chinese Vice Finance Minister Zhu Guangyao warned on Monday that failure by the U.S. to raise its debt ceiling would have global ramifications.
[…] While it doesn’t disclose holdings, a major chunk of its roughly $3.5 trillion in foreign reserves is invested in U.S. government debt. China holds $1.277 trillion in overall Treasury debt, more than any other country. Japan is second with $1.135 trillion.
[…] On Monday, Mr. Zhu recalled the downgrade in saying he hoped the U.S. would take a lesson from history and realize its responsibilities as both the world’s largest economy and holder of the global reserve currency, according to Xinhua.
China has moved in recent years to diversify its holdings away from U.S. government debt, both to seek higher returns for its cash and to reduce risk. As of June, about 35% of the foreign-exchange funds held by China’s State Administration of Foreign Exchange were in U.S. government debt, according to a Wall Street Journal analysis, compared with 45% in June 2010. [Source]
By “lessons of history” Zhu presumably meant the July 2011 budget showdown that prompted the rating agency Standard & Poors to downgrade US debt. After that point China’s holding of US Treasurys declined significantly (see chart below). It then rose again, but has recently fallen back. Zhu seemed to be hinting today that if the US continues to engage in debt brinkmanship it’s at risk of losing its biggest creditor. That would drive up the interest it has to pay and worsen its debt situation.
However, the truth is that whether China buys US government debt has far more to do with its trade balance and capital flows than with the shenanigans in Washington. […] [Source]
As the U.S. government shutdown continues, see prior CDT coverage of Chinese government and netizen views of the situation in Washington, and how it may be undermining America’s political position in Asia.