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China Confident US Will Avoid Default

China expects that the U.S. will be able to resolve its debt-ceiling impasse without triggering a default, advisers to the central bank and government say.

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As the biggest foreign creditor to the U.S., China stands to lose the most from any delayed payment of interest on Treasury debt or from a downgrading of the U.S. sovereign rating that hurts the dollar.


Despite the apparent deadlock in budget negotiations between Democrat and Republican lawmakers before an August 2 deadline, Chinese advisers expressed confidence that a crisis would be averted.

“If they don’t raise the debt ceiling, will the American economy be able to go on? The two parties are just playing political games,” Xia Bin, who holds an academic seat on the monetary policy committee of the People’s Bank of China, told the Financial Times. “The chance that they don’t raise the ceiling is very small.”

Nevertheless, Mr Xia said that China still needed to speed up the diversification of its foreign currency investments away from US assets because the dollar was set to decline in coming decades.

His view was echoed by Zhang Ming, a researcher in the Chinese Academy of Social Sciences, a top government think-tank in Beijing.

“Before August 2, there will be quite a satisfactory solution, at least in the short term. The risk is very low of a sudden US debt default,” he said. “So buying US debt is not a short-term risk. It’s more medium term, because of the potential for big dollar depreciation or for U.S. inflation.”

China officially held $1,152bn in US Treasuries at the end of April, about one-quarter of all U.S. government debt in foreign hands, according to U.S. data.

Standard Chartered Bank said last month that there was evidence that China had stepped up the pace of its reserve diversification this year by investing about three-quarters of its new foreign exchange holdings in non-US dollar assets.

But no one is talking about China cutting its stockpile of U.S. Treasuries, only adding to it at a slower rate.

With Chinese foreign exchange reserves increasing by $350bn in the first half alone, Beijing had little choice but to put its misgivings to one side and buy more US Treasuries, the largest and most liquid market for foreign exchange investments, Mr Zhang said. The key for China was to slow its accumulation of currency reserves by, for example, letting the renminbi appreciate more quickly.

Chinese officials have so far remained circumspect about the debt negotiations in the US even as Standard & Poor’s followed Moody’s last week in putting the country’s triple-A credit rating on review for possible downgrade.

Asked last week about the Moody’s warning, a Chinese foreign ministry spokesman gave a one-sentence response, saying he hoped that the U.S. government would adopt responsible policies and protect the interests of investors.