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.
“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