Seeing Its Own Money at Risk, China Rails at U.S.
Published: October 15, 2013

WASHINGTON — China has become shrill in its criticism of the fiscal train wreck in the United States, arguing that the answer to a potential government default is to begin creating a “de-Americanized world.” Beijing’s alarm is understandable, given that it is the world’s largest investor in American public debt, with at least $1.3 trillion in holding

But China does not have many options beyond wringing its hands. Despite its efforts to steer its economy away from exports and toward domestic demand, China generates billions of dollars of excess cash that it needs to park somewhere. And for all the chaos in Washington, Treasury bonds remain a safer investment than most of the alternatives.

That dependence may help explain the stridency of a recent commentary published by the official Xinhua news agency. It called for the replacement of the dollar as the world’s reserve currency “so that the international community could permanently stay away from the spillover of the intensifying domestic political turmoil in the United States.”

“As U.S. politicians of both political parties are still shuffling back and forth between the White House and the Capitol Hill without striking a viable deal to bring normality to the body politic they brag about,” the news agency said, “it is perhaps a good time for the befuddled world to start considering building a de-Americanized world.”

Chinese officials made similar noises five years ago, when the United States was being buffeted by a banking crisis. In March 2008, the leader of China’s central bank, Zhou Xiaochuan, proposed creating a new “supersovereign currency” that would diminish the importance of any individual national currency, not least the dollar.

But economists who follow China’s monetary policy say that while Beijing has somewhat diversified its foreign exchange reserves, it continues to rely heavily on Treasury bills and other American government-backed debt.

Part of the problem is the lack of easy alternatives: euro-denominated debt has been hurt by the European Union’s crisis, except in Germany. Analysts estimate that 60 percent of China’s $3.66 trillion in reserves are still in dollar-denominated debt, though the precise numbers are a secret.

In its commentary, Xinhua embellished its call for a new reserve currency with a scathing indictment of the United States’ broader role in the world, saying that the Obama administration claimed “the moral high ground” while covertly “torturing prisoners of war, slaying civilians in drone attacks and spying on world leaders.”

Edwin M. Truman, an economist and former Treasury Department official, said: “This is political blather. It is a politically defensive response to the choices China has made.”

That does not mean a brush with default will not have long-term damaging consequences for the United States. Even if China continues to buy Treasury bonds, economists said, it may opt for those with shorter maturities, which would drive up long-term interest rates in the United States, hurting home buyers and owners of small businesses.

The sour taste from the budget impasse will also motivate the Chinese to intensify their efforts to deepen their own debt markets. Already, China has negotiated swaps for its currency, the renminbi, with the European Central Bank and other institutions, a step toward making the currency convertible and, someday, a rival to the dollar and euro.

“This gives them a kick in the pants to do it,” said Kenneth S. Rogoff, professor of public policy and economics at Harvard and a former chief economist of the International Monetary Fund.

Any decline in the status of the dollar will be gradual, said Mr. Rogoff, who pointed to the erosion of the British pound sterling over several decades as a precedent. But, he said, “Memories are long: you do this once, you do this twice, and people start to think.”

President Obama appeared to have those long-term effects in mind when he was asked last week what message he had for big bondholders like the Chinese and Japanese. After saying that he had assured world leaders that the United States would continue to pay its bills, he noted that the specter of default, and the fact that the United States had flirted with it once before, could sow lasting doubts overseas.

“We saw what happened in 2011,” Mr. Obama said. “I think the assumption was that the Americans must have learned their lesson, that there would be budget conflicts, but nobody again would threaten the possibility that we would default. And when they hear members of the Senate and members of Congress saying maybe default wouldn’t be that bad, I’ll bet that makes them nervous. It makes me nervous.”

For all the anxiety, though, the prevailing belief overseas is that the United States will avert a default. At last weekend’s meetings of the World Bank and I.M.F. in Washington, Mr. Rogoff said, none of the visiting finance ministers expressed genuine fear that Congress and the White House would not find a way out.

The fiscal deadlock, he said, cast such a long shadow over the gathering that the ministers did not have to dwell on the financial and structural problems in their own economies.

China is a case in point. While the Chinese government has taken steps to shift its economy from a dependence on exports toward one fueled by domestic demand, the progress has been fitful. At the behest of its exporters, it continues to artificially depress its exchange rate, which it does by using its export earnings to buy dollars and other foreign currencies.

In the first quarter of this year, economists say, the Chinese government added more to its foreign exchange reserves than in all of 2012.

On one level, China’s $3.66 trillion hoard is a symbol of its financial might. But on another, it has tied Beijing’s hands. China’s central bank, the People’s Bank of China, cannot dump its Treasury bonds without driving down their value and incurring a painful loss on paper.

“This is certainly a wake-up call for them that holding U.S. government securities is not risk-free,” said Nicholas R. Lardy, an expert on the Chinese economy at the Peterson Institute for International Economics. “What they should be doing is quit adding to their foreign reserves.”

This article has been revised to reflect the following correction:


  1. China is attempting to pay back America and England for that opium war shit from 19 O LONG and rightfully so.

    1. dem nuh heeezieeeeeeee…dem can pay back but at the end of the day an addict is an addict…dem need likkle blame to..and with that said..u know we cannot manage china pay back..dem nuh normal wid dem ting u know dat

      1. lol…dem would turn de entire world into slave factories and have we a nhame rice day in and day out wid mystery meat.

        1. u know it! dem dangerous man…if dem can try tun pork ina beef dem will all mek we nyam wiself n tink a some rare delicacy

          1. Met tawk bout the mixup meat whey dem paint fi look like fish mi say mi fraid a China so till dem caaaa b trusted all the shipment a toothpaste whey full a poison and it reach inna the senior home n kill off the ppl dem smh dem scary bad

  2. And dis just prove HOW MUCH HATRED the politician dem have fi Obama! To the point where they are willing to pop down & embarass America JUST to make him look bad!

    Racism is alive & well folks!

  3. MET, i think Phantom Phoenix may be referring to how Walmart get how much tax break because dem supposedly ’employ’ how much people but dem nah talk seh Walmart ah pay dem mostly minimum wage & keep most ah dem hours to less than 35-40 hours, which would mean dem ah nuh full-time employees & Walmart no haffi gi dem health insurance coverage! So now all dese people haffi get welfare & Medicaid/Health Plus while dem ah work, just fi manage!

    So basically, Walmart ah get tax break fi employee people, but dem same people dem whe dem ’employ’ ah bleed weh di same tax system/taxes whe Walmart nah pay!

    Read di link below & you will see:

    Plus this Jon Stewart show highlight the MURDER whe most ah dese big business ah get whe with when it come to taxes! And if we nuh pay we taxes dem waan lock we up like Lauryn Hill & Wesley Snipes!: (you have to watch the stupid commercial first)—pay-anything—

  4. Lol if I laugh my pussy must pop a pop pop pop! No sah. The world cannot have one currency because that would basically bring us back to the barter system. The reason that we got rid of the barter system is because of the difference in value of goods and services. Whether or not they would like to believe dog meat grown in China naw go taste the same as grown in other places, it is true. Caw the Chiny dem no kya. Anything them a do must do slap-dash.

    So for the world to have one currency would only be beneficial to China. Mek them move. If they want they can do like a few other countries particularly tourist destinations, where U.S currency is the major currency used because the people find it more beneficial to themselves. And anyway one would assume that they already have a huge black market for American dollars in China.

    Dem too nuff them need to tek their people out of the fowl coops they are living in and stop thief Africa diamonds.

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