Is cutting US debt holdings a way out?

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Is cutting US debt holdings a way out?

(Global Times) 08:15, October 18, 2013

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Democrats and Republicans reached a compromise on the US debt ceiling, putting an end to the White House shutdown on Thursday morning and bringing a temporary solution to the debt crisis. Nonetheless, the 11th-hour deal will stay effective only till February 7, 2014 and the two parties will face the possibility of another bitter budget calamity early next year.

As the single largest foreign creditor of the US, China has every reason to feel anxious. It has been years since Chinese started calling for the central government to slash US debt holdings and such appeals have been flaring up recently.

China's business analysts hold diverging views on whether the government should cut back US debt holdings and whether it is realistic to do so. Scholars who support a huge reduction have drawn wide attention and even been applauded by the general public, but the reality is that China's US debt holdings are on the increase despite short-term reductions.

Therefore it seems not so simple. Those in favor of increases in US debt holdings or maintaining the status quo contend that there is no better channel for China's large foreign currency reserves accumulated by an enormous amount of trade surplus. As the biggest economy and a financial power, Washington has many ways to deal with Beijing's reduction of its national debt. However, such reductions will, in turn, expose China to more risks.

A reality must be noted that the US is the issuer of greenback counted as the most widely used currency of settlement. As long as China's economic volume does not match that of the US, the Chinese yuan will not enjoy the same status as the US dollar.

It appears unfair that Beijing's options to utilize its foreign reserves are basically in the control of Washington. It's an arduous task for China to gradually turn around this situation.

However, China is not completely passive in the long-term process. It has huge potential to engage in a competition with Uncle Sam since such a colossal amount of national debt means a certain degree of leverage. Beijing needs to have the capacity to build on its strength.

In fact, China and the US are interdependent in terms of economic development. Any problem in the US debt will likely bring a catastrophe to its economy and volatility to the world economy.

As an open economic power with wide reach, China cannot stand aloof if a crisis happens.

At present, China is supposed to ensure that its debt loss is much smaller than the US loss caused by its credit bankruptcy.

（Editor：LiangJun、Yao Chun）