As Congress drags its feet against a looming deadline to increase the nation’s borrowing limit or risk default, China urged Washington this week to act quickly and ensure the safety of its U.S. investments.
The message from the world’s second-largest economy isn’t surprising. As Chinese Vice Finance Minister Zhu Guangyao noted on Monday, China is the largest foreign creditor to the U.S.
The country has the world’s largest stockpile of foreign-exchange reserves, partly due to its efforts to encourage exports by holding down the value of its currency, the yuan. China doesn’t disclose its holdings, but a chunk of its foreign reserves is invested in U.S. government debt; as of July, the country held $1.27 trillion in U.S. Treasuries. That’s more than any country, followed by Japan, which holds $1.135 trillion.
If anyone should worry about a possible default, it’s the Chinese, according to Deutsche Bank. It ranked China third as having the largest holdings of U.S. debt next to recipients of U.S. social security and the U.S. Federal Reserve.
On the question of the debt ceiling, the Chinese side feels the U.S. needs to take realistic and resolute steps to ensure against default on the national debt,” Zhu said.
Given China’s stake, it’s reasonable to think the country is positioned to break the debt-ceiling impasse. Theoretically, China could threaten a large sell-off that could potentially send bond prices into free fall. But that’s a crazy idea that nobody is actually supporting — at least not seriously nor publicly, especially not China.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.