China to United States: Don’t Default, For Our Sake

As the U.S.'s biggest creditor, China has good reason for concern

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Mikhail Kireev / Host Photo Agency / Getty Images

Vice Minister of Finance of the People's Republic of China Zhu Guangyao attends the briefing at the G20 summit on Sept. 5, 2013 in St. Petersburg.

One day after Republican House Speaker John Boehner promised to “stand and fight” over the budget, Chinese officials have pleaded with America’s deadlocked Congressmen to stand down. “The clock is ticking,” Chinese Vice Finance Minister Zhu Guangyao warned on Monday. “We ask that the United States earnestly takes steps to resolve in a timely way the political issues around the debt ceiling.”

And what if the clock runs out? Then China, the U.S.’s biggest creditor, will be left holding the bag. Its government holds $1.3 trillion in U.S. Treasury bonds and a whopping $3.5 trillion in dollar-denominated assets. It has racked up these holdings through an export-oriented trade policy, by which China sells goods and services to the U.S. and gets dollars in return. China then plows those dollars into the world’s safest investment, the U.S. Treasury bond.

That suited everyone just fine until the Treasury began ringing the alarm bell about a possible default on October 17th. A default could wreak havoc on the value of China’s dollar-backed assets. A huge portion of China’s wealth depends on the U.S.’s ability to pay down its loans.

(MORE: Debt-ceiling Standoff Threatens America’s Global Leadership)

“Once this concept is subverted,” opined a columnist for China Business News, “It will undoubtedly cause a disaster and hit the global economy hard.” And as far as that columnist was concerned, the fallout would land squarely in his own backyard. “Who would be most impacted? The U.S. government’s largest overseas creditor, China.”

Ma Guangyuan, an economist in Beijing, echoed the sentiment that the battle in Washington really wasn’t about Washington. “The fight between the two parties in America won’t necessarily hurt them,” he said, holding out hope for a political breakthrough, with or without Congress. “I believe this time, America will increase the debt ceiling again,” he said. “If they don’t, they will have to figure out a way to break the contract. For example, they may print more currency.”

The larger concern for China, he pointed out, extended well beyond the current impasse to the U.S.’s long-term debt burden. “I never understand how they are going to pay it back,” he said. “I don’t think they can pay it back.” But with $1.3 trillion on the line,  he argues that China must cling to its faith that the U.S. will eventually pay back its loans. “Every creditor believes that they can,” he said. “They believe that even more than Americans do, because they have no choice. If the creditors don’t believe America can pay them back, then the global economy would collapse.”

Only a cataclysmic event like a default could shake China’s self-preserving faith in the Treasury bond. “We hope that the U.S. can draw lessons from history,” said Chinese Vice Finance Minister Zhu Guangyao. Really, the world doesn’t have a choice.

—With reporting by Chengcheng Jiang/Beijing

18 comments
n3angus
n3angus

Obama-Backed Trans-Pacific
Partnership Expands Corporate Lawsuits Against Nations for Lost Profits

listen to this video at 11:00 forward , it has a part at 12:45 that will
REALLY " T " YOU OFF !!!!

http://www.youtube.com/watch?v=_4eZcm4ZO6o

I heard something in this video about healthcare costs associated with
medicine costs being escalated at the 11:00 frame going forward too .

Here is more on the Cost of Medicine going up due to the TPP,

http://www.democracynow.org/2013/6/6/obama_backed_trans_pacific_partnership_expands

marielito46
marielito46

Obama you yes need to keep your eye in the USA defense..Don't forget that China is the enemy of humanity...

marielito46
marielito46

Now that China is puting a red line to USA...if USA pay them USA is a cower...don't pay...China go and cook that is the only you can do.

PeteRuth
PeteRuth

This is an incredibly ill-conceived report. China owns only 8.1% of the US Debt. Social Security alone owns more than twice that. This article is making it sound as if China would get hurt (whoopee...) but in default, the people that are hurt the most is the people of the United States themselves. Default means that we end up missing payments to pension funds, mutual funds, and to private investors.

Get the facts straight, guys. Time is better than doing a puff piece about poor old China, the country that has a drone fleet 10x the size of ours.

BrianEdwardCroner
BrianEdwardCroner

I hope we default and the US Dollar becomes worthless. Then we can use a different currency.

mlouisa70394
mlouisa70394

I am just wondering if we can pay China back with all the poisonous products it has shipped to us, and also all the dead dogs that ate dog food from China, and we should also throw in all the polluted air coming from China to the US and Japan, and let's not forget that China's leaders are responsible for killing a lot of Chinese, Tibetans, Uighurs, Falun Gong Practitioners, and dissidents, so we need to send a lot of handcuffs so that all those leaders can be arrested and hung in prison cells. That's all I can think of for now, but I'll keep thinking how we can pay China back.....

duduong
duduong

China holds $1.3T in Treasury notes and $2T in other dollar denominated assets. If the US defaults, dollar will lose the status of global reserve currency and drop like a dead duck from sky, and China will suffer a loss on a significant portion of its holdings. All true, but which currency will succeed dollar as the new reserve currency? Euro? Yen? How about Renminbi? Whose currency do you want to hold? The one whose economy is growing at 0.5%, 1.5% or 7.5%? The new guy then gets to print tens of trillions out of thin air. Overall, not a bad trade for China.

If you think a loss on a portion of $1.3T is terrible, what about an equal percentage loss on all the assets in the US, which are by default all dollar denominated. Guess what, most of these hundreds of trillions of dollars worth of assets are held by Americans. So, the argument that China will lose if the US defaults is like saying that, if an American shoots himself using a bullet borrowed from a Chinese, the latter will lose his bullet. It is certainly true, but it also most certainly misses the big picture.

11B_INF_Retired
11B_INF_Retired

USA to China.....  F U !   We are broke and we have to balance our budget!  Go sell your cheap goods somewhere else!

thereo
thereo

@BrianEdwardCroner yeah you wish. Nobody will give two sh it on new currency and we'll be left starved and died. 

perhapshey
perhapshey

@mlouisa70394 You're talking nonsense. Falun Gong deprive many people's lives, do not you think it is cult.

U.S. media only bad side to promote China, most of them are fake. I hope you understand China through your own judgment.

thereo
thereo

@mlouisa70394 let's not forget that US leaders are responsible for using Middle East as proxy, genocide at Africa, dumping at Cuba, Jamaica, spying at others (Brazil, UK, France, Germany, China, .....) 

You don't need to think how to pay China back. All thoughts coming out of your brain is caca.  

thereo
thereo

@11B_INF_Retired Guess what? China told US STFU. get it? 

First get your lazy ass and get your work ethics together!!! 

MichaelSchwinn
MichaelSchwinn

@thereo @mlouisa70394  GIVE THEM THE TRILLION DOLLAR  BIT COIN AND THEY CAN SPEND IT IN THE UNITED STATES OF AMERICA , BUT CAN NOT BUY ANY MORE REALESTATE!! SELL THE CHINESE NO MORE REALESTATE

JustinHaser
JustinHaser

@thereo Perhaps you will one day learn to read. Why would he want to get his "work ethic" together if he is RETIRED, not to be mistaken for RETARDED which you clearly are.