2011-08-09 14:42

BEIJING - The twists and turns that shrouded the debt ceiling crisis in the United States have fueled the perception that even as the US struggles to find a way out of the economic quagmire, its political system seems to have hit a snag.

Even though American politicians at times enjoy a reputation of being good at making the compromises they deem necessary, this time, they have ignored the legitimate concerns expressed across the world and resorted to brinkmanship.

Most of the competing proposals they floated were imbued with strong partisan biases giving the perception that the main priority for them was the 2012 general elections rather than national economic welfare.

After much bickering and tinkering, the leaders of Democratic and Republic parties in the US Congress finally forged an agreement that intends to raise the nation's debt ceiling and cut government spending.

Even as American politicians breathed a sigh of relief and sense of exhilaration at having prevented an unprecedented debt crisis, the breathtaking drama has only ended just one of the many chapters in the long-winding economic saga.

Over the past few months, we have been seeing a deepening divide on Capitol Hill. Although Democrats and Republicans finally managed to cut a deal, no one emerged the victor from this protracted fight. The damage has already been done and the image of the US tarnished.

The deal that Democrats and Republicans have cobbled up together is a dose of painkillers, that can relieve the financial headache once, but not an effective solution for the fundamental problems.

The deal, for instance, does not have answers on how the American government will generate more revenue to offset its growing budget deficit. Actions like imposing sweeping spending cuts over the next decade will only depress the economy further.

As economist Paul Krugman commented, the "deal itself, given the available information, is a disaster", we have good reasons to expect that as the symptom of American economic illness surfaces once again, another dose of painkillers may be in order.

The history of the past 100 years demonstrates that the US governments, regardless of their political orientation, seemingly shared one addiction: borrow tomorrow's money for today's consumption. In fact, the government's appetite for borrowing more money has become dangerously insatiable.

As the nation most affected by the US debt crisis, China has watched the ongoing drama in Washington with despair. China has expressed strong disapproval of the quantitative easing monetary policy (QE), which allows the US government to print more money, to shore up its budget deficit, thereby further depreciating the dollar's value.

As the biggest holder of US debt, Chinese certainly does not want to see the value of the debt assets held by the US diminishing. But at the same time, the nation will also shudder if the US government stops paying its debts.

Although raising the debt ceiling may lead to QE, in comparison with unwanted QE, the US government default on its debts is more catastrophic. Rather than face two demons at a time, China has selected the lesser evil.

The ambivalence harbored by China toward the US debt issue has also revealed a dilemma about the nation's debt relationships. Lending huge chunks of money to one single country, which also happens to be a strong nation that can print hard currency at its own discretion, is a dangerous business.

Even though China realized the pitfalls that have accompanied its rise as the numero uno creditor to the US, it has not taken any firm action to change its course.

For China, therefore it is important to diversify its purchase of foreign debt. The current debt limit crisis was alarming, as many people believed that the US government would actually default this time.

In order to protect its overseas assets, China will have to step up its efforts to buy more sovereign debt from other countries in a selective way, and also cooperate with other creditors to prevent future debt issues in the US from snowballing.

China also needs to think twice of its long-held "nice and quiet" plus "wait and see" approach toward the US debt issue. Its stake in American debt is so significant, that China cannot afford to let American politicians take unilateral action on the destination of its assets. China should take a proactive approach to discuss this issue with the US under the framework of the Strategic and Economic Dialogue, and make this talk more productive by instituting an expert working committee on this specific issue.

With such down-to-earth talks, China can also earn more time to prepare for any kind of scenarios associated with its debt.

The current American debt is also a wakeup call that China needs to re-examine the will and capability of the US government for debt repayment.

The author is a scholar at the Renmin University of China.