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China Daily Website

China has to brace for next dollar drama

Updated: 2013-10-21 10:03
( Agencies)
Deal or no deal, the US Congress' dance with default impressed policymakers and investors in China and Japan with just how vulnerable their own economic revival plans are to the next political tantrum on Capitol Hill.

The 11th-hour agreement on Wednesday between Congressional Republicans and Democrats to raise the limit on US government borrowing and end a 16-day government shutdown also averted a default on US Treasury bonds that had threatened the global economy and financial system.

But Congress gets another chance to hold US creditworthiness hostage early next year ahead of a new Feb 7 deadline to approve a debt ceiling increase.

"We're glad a deal has been struck," said a Japanese policymaker, who spoke on condition of anonymity. "But the uncertainty will remain and it will be the same thing all over again early next year."

He and other Japanese officials say they have already developed contingency plans that include flooding Japan's banking system with cash to keep markets functioning however panicked investors become. And analysts say China, whose leaders are due to hold a key policy meeting next month, may step up a push for global acceptance of its currency, the yuan or renminbi, as an alternative to the US dollar in international trade.

"They might actually consider accelerating the process," said Vincent Chan, head of equity research at Credit Suisse in Hong Kong. "You strengthen the case of making the renminbi a genuine international currency, because the Americans are unreliable."

Near-debt experience

Perhaps no two economies outside the United States have more at stake in Washington's recurring drama than Japan and China.

Not only are they the second- and third-largest economies, but they lend Washington more money than any other single nation. China held $1.28 trillion in US Treasury securities at the end of July and Japan owned $1.14 trillion. A default would likely have devastated the value of their holdings.

More than that, though, both nations have adopted policies to revitalise their own economies that to some extent rely on the improving economic appetite, stable currency and increasing indebtedness of the world's largest economy.

China is trying to deflate a dangerous credit bubble and wealth imbalances with a series of reforms that include slowly easing controls on moving money into and out of the country and allowing its currency to gently appreciate.

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