Both China and Japan have directly expressed the fear over the effects of the shutdown on their own economy. China is the biggest creditor to the US , owning around $1.277 trillion in bond, while Japan owns around $1.135trillion. They need the US to make an agreement by October 17th over raising there "debt ceiling," otherwise risk defaulting on their debts. The debt ceiling is a legislative restriction on the amount of national debt that can be issued by the treasury. The current debt ceiling of $16.7 trillion was reached on May 19th. Since then the US has temporarily cut its borrowing. To avoid defaulting on its debt, payments could be prioritised out of incoming cash . This would mean going back on even more of its other obligations such as social Security, medical payments or military. If the government had to cut spending immediately to match incoming revenue, it would impose a hit worth 3.4% of GDP over a full fiscal year.
China's deputy finance minister pointed out that a similar debt ceiling crisis resulted in the downgrading of Americas credit rating and emphasised to the world that the "clock is ticking." The fear is that the impact on the bond market is going to weaken the dollar , which is catastrophic as the US dollar is a global currency. The weaker dollar will hit China and Japans exports hard as it makes their goods relatively more expensive to import and thus they lose competitiveness.
However china would not be the biggest loser because it is not the majority holder of US debt.
Most of US debt is still held within the United States by pension funds, insurance companies, banks, thus a US government default would hurt American savers just as much as overseas savers,
"essentially the US shooting itself in the foot, by defaulting on its own debt.”
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Well done Nadeesha for managing to make the current account and exchange rates sound interesting and clear - something I struggle to do!
Here is a paragraph from the article on this topic in the Independent recently:
'These vast foreign exchange holdings are a by-product of China’s closed financial system and persistent current account surplus, which means that most foreign currency that enters the country accumulates with the central bank. The central bank then invests the money in normally “safe” dollar assets. The vast dollar reserves are also a legacy of China’s policy in recent decades of artificially holding down the value of its currency, the renminbi, in order to boost the overseas sales of its politically influential export industry.'
What's amazing for oldies like me is that we've reached a point where the Chinese are complaining to the Americans about the state of their economy!
The article goes on to say:
'China has been promoting the idea of a new reserve currency to replace the greenback, with some analysts suggesting that the renminbi could one day take its place.'
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