Holding upwards of $1.1 trillion in U.S. debt, it is no secret thatChina is America"s leading foreign creditor. It came as nosurprise, then, that while traveling through Asia last week U.S.Secretary of State Hillary Clinton gave strong assurances toBeijing that policymakers in Washington would soon reach anagreement raising the country"s debt ceiling. Yet, as eachday passes without resolution, the unthinkable possibility that theworld"s largest economy might actually default on its debtobligations seems increasingly conceivable. What exactly would a U.S.
default mean for Sino-American relations?Perhaps surprisingly coach factory Not tolerating the intolerant - China Miniature Architectural Mode
, the reputational consequences would likelyovershadow the economic effects of such an event. The notion that China will stop buying U.S. treasury bonds orperhaps commence a massive sell-off of T-bills it already holds asa way to defend itself from financial losses or punish the U.S. forreckless behavior is unfounded. China has little choice but tocontinue buying U.S.
debt in the near-term, even if the U.S.suspends interest payments to Beijing for a period of time.Here"s why. First, U.S. treasuries are still the most viable investment vehiclefor China and its massive foreign exchange reserves. Whileshrinking of late, China"s trade surplus with the U.S. Led Flood Light Fixture
isstill significant—nearly $50 billion in the last quarteralone. The U.S. debt market is nearly singular in its ability toabsorb such huge quantities of dollars. One reason China buysT-bills is because the market is both deep and liquid, allowingparties to get prices, buy, and sell quickly christian louboutin outlet Virginia baptist hospital marks n
. So long as Chinawants to maintain its export-led growth model, it will need to findplaces to invest its reserves and U.S. China Led Wall Light Fixtures
Treasuries will remain thefirst option, post-default or not. Second, China wants to maintain a stable yuan-dollar exchange rate.The People"s Bank of China buys up all the dollars that enterthe economy and uses them to buy Treasuries which props up thevalue of the dollar vis-à-vis the yuan. This has enabledChina to preserve its export competitiveness longer than itotherwise would have. Third, Beijing is too smart to employ the "nuclear"option of selling off a large portion of its U louboutin sale shoes
.S. Super Bright Led Light Bulbs
debt since thismove would debase the value of its remaining dollar denominatedinvestments. In other words, a U.S. default isn"t likely to have a lastingimpact on Sino-American financial relations as things should returnto the status quo rather quickly once the U www.christianlouboutinoutletwow.com
.S. cleans up its fiscalmess.
Nonetheless, China is keenly aware of its exposure to U.S.government debt and has been slowly apportioning a smallerpercentage of its reserves toward buying T-bills of late. But, thisis not a direct response to the debt ceiling debate. Rather, thisis part of Beijing"s long-term plan that involves a stronger,internationalized yuan and a more consumption-based economy. AnAmerican default would simply further validate this strategy. On the other hand, while the financial relationship of the twopowers should continue unchanged, a U www.christianlouboutinoutletwow.com Samsung refreshes series 5 chromebook, annou
default would generateserious reputational consequences for both countries. And, in thiscase, China would emerge the clear winner. For more than 60 years, the U.S. has been the world"sunchallenged leader on global economic issues. This status has madeit easier for the U.S.
to get other countries to want the kinds ofeconomic policies favored by the U.S., what Joseph Nye dubbed"soft power". Indeed, it has attempted to use thisagainst China by insinuating that its policy of keeping the yuanundervalued is not fitting of a leading global economy. However, American moral authority on economic issues is eroding dueto recent events viewed around the world as either reckless orself-serving. An American default would represent the third major strike againstAmerica"s reputation as a responsible and stabilizing forcein the global economy. The first strike came in 2008 when the subprime bubble popped andplunged the world into recession.
Since then, a seemingly endlessstream of reports and documentaries on the American financialsystem has transformed its image from being the envy of the worldinto the poster child for capitalism gone wrong. The second strike came in the fall of 2010 when the Federal Reservewent ahead with a controversial second round of quantitativeeasing, now ubiquitously (perhaps infamously) known as"QE2". The Fed"s bond buying program launchedjust a month after Brazil"s Finance Minister, Guido Mantega,said the world was "in the midst of an international currencywar louboutin sale
." While the Fed said QE2 was designed to stimulate thedomestic economy by keeping interest rates low, many outsidersviewed it as a return to "beggar-thy-neighbor"policies; a veiled attempt to depress the dollar"s value andmake U.S. goods more competitive in foreign markets.
A default on its debt obligations would mark the third strikeagainst America"s once favorable international economicreputation. That the "debt crisis" is self-inflictedonly serves to harden the blow. The fact of the matter is christian louboutin sale shoes
, if theU.S. defaults, it won"t be because markets wouldn"tlend—it"s because politics wouldn"t allow thecountry to borrow coach factory
In the world"s eyes, this looks negligentat best, foolhardy at worst. Meanwhile, China"s reputation as a responsible globaleconomic leader has improved since the global crisis. Though it didface increased criticism from some corners when it reinstated itsde facto yuan-dollar peg, China justified this by arguing that inuncertain times, its role was to maintain a stable currency in avery unstable global economy. It has since allowed the yuan toappreciate against the dollar, albeit at a very slow pace. Beijing also implemented a $586 billion stimulus plan in 2008 thatwas praised by the International Monetary Fund (IMF) as not onlygood for China, but a boon for an ailing global economy.
Lastly,China is poised to become the third most powerful voice within theIMF when the latest quota review is completed. In short, itsleadership credentials are rising even as America"s arecoming under greater scrutiny. Thus, while the financial consequences of a U.S. default forSino-American relations would be fleeting, the reputationalconsequences could be enduring.
American default will further erodeany moral authority the U.S. has vis-à-vis China on economicissues such as the yuan-dollar exchange rate. In the long-run,China might actually emerge the biggest "winner" if theU.S. defaults, gaining insulation from American criticism andperhaps assuming the mantra of the world"s most responsibleeconomic power. Daniel McDowell is a Bankard Fund for Political Economy Fellow atthe University of Virginia and has written for Foreign Policymagazine, Washington Times, and is a regular contributor to WorldPolitics Review.