Is this China’s chance to shine as US debt-ceiling impasse raises global fears?
- US debt debacle seen contributing to a relative rise in China’s status, while a failure to reach a deal in Washington would ‘cause significant volatility’
- Foreign investors could be finding that Washington’s image has been tainted by the US-China trade dispute, along with ‘violations’ of World Trade Organization rules
China’s on-again, off-again image as a destination for foreign investors may brighten in the coming weeks as debt-ceiling talks in Washington fan global worries about the stability of US assets, according to economists.
Even if President Joe Biden and the US Congress reach a deal that raises the current US$31.4 trillion debt ceiling and thwarts an international credit crisis, their tense negotiations paired with other news from Washington could make China look relatively attractive, some analysts contend.
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Negotiations this month in Washington are intended to work out a budget-spending deal that would push sceptical lawmakers to allow raising the debt ceiling as soon as June 1, the date when the treasury says the US could start defaulting on commitments.
The now five-year-old US-China trade dispute, along with “violations” of World Trade Organization rules, further taint Washington’s image overseas, Xiao Yu, an assistant researcher with the Institute of Asia-Pacific and Global Strategy under the Chinese Academy of Social Sciences, wrote in a May 12 commentary for the China-based 21st Century Business Herald.
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Central bankers in third countries may tap China to pad out their reserves if the US reputation takes a hit, said Zhang Zhiwei, a chief economist at Pinpoint Asset Management in Hong Kong.
“The potential positive for China is that global central banks may diversify their reserves, reducing their holding of US Treasury [securities] and adding others, including Chinese government bonds,” Zhang said.
“It’s really because they want to depend less on US dollar use just in case something were to happen,” Song said. “You must be able to push development forward so you can create jobs and wealth.”
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Analysts say business should continue as usual in China if the US debt ceiling goes up, as markets expect. US lawmakers have had the same debate before, including a 2017 impasse and a 2018 increase to the debt limit.
“The ceiling raise itself should not be a trigger for anything new,” said Chen Zhiwu, chair professor of finance at the University of Hong Kong. “Whatever they’ve been doing [in China], they will continue to do.”
A higher debt ceiling could see “risk sentiment improve”, said Robert Carnell, regional head of Asia-Pacific research with ING. Investors generally consider Chinese assets among the world’s riskier ones.
If the ceiling does not get a lift, US Treasury bond interest rates would rise, with borrowing costs to follow, Chen said. Asset prices would go down, and the odds of default up, he added. Compared with other big holders of US bonds, he said, “China is not unique in any way”.
If the ceiling cannot be lifted, it would … cause significant volatility
China began adding purchases of US Treasuries in 2000, until 2014 and remains the largest foreign holder after Japan. Beijing has cooled purchases since then, with a notable decline this year.
Xiao asks in the commentary whether US government bonds can “still be a global asset anchor”.
US Treasury bonds are normally rated as low-risk investments because investors believe the US government backs them in full.
“If the ceiling cannot be lifted, it would come as a big surprise to the market and cause significant volatility,” Zhang said.
“It would be negative for global financial markets, including China. The economic impact would be negative as well, as financial volatility would damage real economic activities through wealth effect and trade.”
