China calls on US to stay solvent

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By GAO CHANGXIN in Hong Kong and Wei Tian in Shanghai (China Daily) 17:26, October 08, 2013

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In its first response to the US government shutdown by a senior official, China asked the United States to solve the political impasse and stay solvent to ensure the safety of massive Chinese assets.

Vice-Minister of Finance Zhu Guangyao said on Monday that China, the US's biggest creditor, is "as a matter of course concerned about the fiscal cliff in the US", and "it's the US's responsibility" to protect the interest of its creditors.

The US has once again stood on the fiscal cliff, with the US Treasury Department estimating that it will run out of cash unless Congress authorizes it to borrow more before Oct 17. So far, US politicians have yet to make a deal that would give the authorization.

It's not the first time that political brinksmanship has put the US on the verge of insolvency. In August 2011, the US government barely stayed away from running out of money by agreeing to raise its debt ceiling. Yet ratings agency Standard & Poor's still downgraded the US credit rating to "AA+" from "AAA" as the deadlock shook financial markets worldwide.

"We hope the US will learn from history," Zhu said.

This time, the US' creditors, including China, are even more concerned. "Non-essential" government agencies were closed on Oct 1 after US politicians failed to agree on a new budget. When the agencies will reopen is unknown. The last US government shutdown was 17 years ago.

US President Barack Obama last week canceled his trip to Asia, where he was to attend the APEC and East Asia summits.

China held $1.27 trillion in US government debt as of the end of July, according to the US Treasury. Investors in China held 11.1 percent of the $11.5 trillion of marketable US debt in July, compared with a record 14 percent in June 2009, according to Bloomberg.

The US has never defaulted on its debt before. And a default will wreak havoc in the global financial system, as US government bonds are the pillar of global financial markets.

US government bonds are considered risk free, and bonds across the globe, including corporate and sovereign, are priced against them, with their risks expressed as a rate spread. A default would push up bond yields worldwide, make borrowing harder, freeze liquidity and eventually plunge the world economy into recession.

According to Bank of America Merrill Lynch indexes, US Treasuries have lost 3.7 percent this year, heading for the worst performance since 2009. The US dollar index, which measures the performance of the US dollar against a basket of currencies, dropped to around 80 on Monday from a high of 84.7 on July 10.

He Weiwen, co-director of the China-US/European Union Study Center at the China Association of International Trade, said the possibility of a US default is slim.

He said that the debt ceiling issue and recent government shutdown are mainly a result of disputes between Democrats and Republicans, and such disputes have become more regular in recent years.

"But the two parties will eventually work out a conciliatory plan," he said.

"It's right, though, for Vice-Minister Zhu to make such a stance to urge the US to protect China's interest," He said.

A larger risk China should be wary of is the possible tapering off of the quantitative easing by the US Federal Reserve, which could lead to possible capital flight from emerging economies, He added, even though the US has promised to consider the spillover effect on other countries when making such a move.