China May Warn US But Has Little Power to Break US Deadlock

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.

via Fortune

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza
Alfonso Esparza

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