Why China and Japan pray the US doesn't go bankrupt | CNN (2023)

Why China and Japan pray the US doesn't go bankrupt | CNN (1)

The US is now 9 days away from a possible bankruptcy

05:09 - bron:CNN

Hongkong CNN

as clockto tapWe are heading for an unprecedented US bankruptcy, folks The second and third largest economies are watching in horror.

China and Japan are the largest foreign investors US national debt. Together, they hold $2 trillion of the $7.6 trillion in U.S. national debt held by foreigners — more than a quarter.

Beijing has increased US bond purchases since 2000, when the US effectively supported China's entry into the World Trade Organization, leading to an export boom. This is costing China a lot of dollars and it needs a safe place to store it.

US Treasury bonds are widely regarded as one of the safest investments in the world, while China's holdings of US debt rose from $101 billion in 2013 to a peak of $1.3 trillion.

For more than a decade, China was the largest foreign creditor to the United States. But as tensions with the Trump administration escalated in 2019 and Beijing ironed out its supplies, Japan overtook China to become the year's biggest creditor.

Tokyo now holds $1.1 trillion, China's $870 billion, subsequently The large exposure leaves both countries vulnerable to a possible collapse in US bond values ​​should a doomsday scenario unfold in Washington.

The U.S. Treasury Building in Washington, D.C., U.S., on Monday, March 13, 2023. Al Drago/Bloomberg/Getty Images America's borrowing is its superpower. it infects it by default

"Japan and China's large holdings of US Treasury bonds could hurt them if their value plummets," said Josh Lipsky and Philip Meng, analysts at the Atlantic Council's Center for Geographic Economics.

The devaluation of the public debt will lead to a decrease in the foreign exchange reserves of Japan and China. This means they will have less money available to pay for essential imports, pay off foreign debt or strengthen their currency.

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But they said "real risks" came from the global economic fallout and a potential US post-bankruptcy recession.

"This is a serious problem for all countries, but it poses a particular risk to China's fragile economic recovery," said Lipsky and Meng.

After an initial pick-up in economic activity following the abrupt lifting of epidemic restrictions late last year, China's economy is now recoveringsprayWhile consumption, investment and industrial production showed signs of slowing down.deflationary pressureThe situation has worsened as consumer prices have hardly changed in recent months. Another major problem is ejectionunemployment rateFor young adults, it was a record 20.4% in April.

Meanwhile, the Japanese economy is showing only signs of recoveryescape stagnation and deflation, has plagued the country for decades.

disastrous effect

Even if the U.S. government runs out of money and takes emergency measures to pay all bills — which Treasury Secretary Janet Yellen says could happen as early as June 1 — the likelihood of a U.S. bankruptcy remains slim.

Some US lawmakers havesuggestedPrioritize interest payments on bonds to the largest bondholders.

This is at the expense of other obligations, such as the payment of state pension and salaries to civil servants, but Alex Capri, a senior lecturer at the National University of Singapore's Business School, said this would help avoid major defaults in countries such as Japan and China.

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And there is no clear alternative to dealing with a rising market Volatility investors can trade short-term bonds for long-term bonds. According to the Atlantic Council's Lipsky and Meng, that could benefit China and Japan, as their holdings are concentrated in long-dated US government bonds.

That said, broader economic contagion and recession pose a greater threat.

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“A US debt default would lead to lower Treasury prices, higher interest rates, a weaker dollar and greater volatility,” said Marcus Noland, executive vice president and chief research officer at Peterson. Institute of International Economics.

"It may also be accompanied by a fall in US stocks, increased pressure on the US banking sector and increased pressure on the housing sector."

It can also lead to problems in the interconnected global economy and financial markets.

China and Japan rely on the world's major economies to support domestic businesses and jobs. The export sector is especially important to China because other economic pillars - such asproperty- falters. Exports account for a fifth of China's GDP and employ about 180 million people.

Despite heightened geopolitical tensions, the United States remains China's largest trading partner. It is also the second largest in Japan. Trade between the US and China in 2022high record$691 billion. from JapanExport to the United States10% increase in 2022.

"As the US economy slows, the impact will be transferred through trade, such as suppressing Chinese exports to the US and causing a global slowdown," Noland said.

deep concern

Bank of Japan Governor Kazuo Ueda expressed concern on Friday, warning that a default on US debt would shock several markets and have dire consequences for the global economy.

"The BOJ will work to maintain market stability in line with its commitment to respond flexibly to economic, price and financial developments," he told parliament.Reuters.

People pass an electronic board showing the closing price of the Tokyo Stock Exchange on a street in Tokyo, May 22, 2023. CreditKazuhiro Nogi/AFP/Getty Images Japan's long-suffering stock market is back. This explosion may have 'staying power'

So far, Beijing has been relatively quiet on the issue. China's foreign ministry said on Tuesday it hoped the US would "pursue responsible fiscal and monetary policies" and "not shift risk to the world."

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Published by the Chinese state news agency XinhuaColumnEarlier this month, the "symbiotic relationship" of the countries in the US bond market was highlighted.

"If the US does not pay its debts, it not only damages US credibility, but also brings real economic losses to China," it said.

Tokyo or Beijing can do nothing but wait and hope for the best.

Capri said a hurried sell-off of US debt would be "self-defeating" because it would significantly strengthen the yen or yuan against the dollar, causing the cost of their exports to "explode."

long term benefit?

Some analysts say a possible long-term US bankruptcy could push China to step up its efforts to create a global financial system less dependent on the US dollar.

The Chinese government has signed a series of agreements with Russia, Saudi Arabia, Brazil and France to increase the use of the yuan in international trade and investment. A Russian lawmaker said last year that the BRICS countries, namely China, Russia, India, Brazil and South Africa, were exploring the creation of a common currency for cross-border trade.

“This will certainly serve as a catalyst for China to continue its push to internationalize the renminbi and push Beijing to redouble its efforts to include its trading partners in the recently announced 'BRIC currency' initiative, Capri said.

However, China faces some serious obstacles, such as controlling the amount of money flowing in and out of the economy. Analysts say Beijing has shown little willingness to fully integrate into global financial markets.

Derek Scissors, a senior fellow at the American Enterprise Institute, said, "A strong push for de-dollarization will lead to ... greater volatility in yuan trading."

The latest data from the international payment system SWIFT shows that the yuan is worth it Global trade finance was 4.5% in March, with the US dollar accounting for 83.7%.

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"There is still a long way to go before there is a credible alternative to the dollar," said Lipsky and Meng.

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Why China and Japan are praying the US won t default? ›

Chinese state news agency Xinhua published a column earlier this month, highlighting the “symbiotic relationship” the countries have in the US bond market. “If the United States defaults on its debt, it will not only discredit the United States, but also bring real financial losses to China,” it said.

Why doesn t China sell U.S. debt? ›

U.S. debt to China comes in the form of U.S. Treasuries, largely due to their safety and stability. Although there are worries about China selling off U.S. debt, which would hamper economic growth, doing so in large amounts poses risks for China as well, making it unlikely to happen.

Who does the US owe more money to China or Japan? ›

With $1.1 trillion in Treasury holdings, Japan is the largest foreign holder of U.S. debt. Japan surpassed China as the top holder in 2019 as China shed over $250 billion, or 30% of its holdings in four years. This bond offloading by China is the one way the country can manage the yuan's exchange rate.

How much do Japan and China hold in US federal debt? ›

Foreign holdings peaked at 49 percent of DHBP in 2011, but dropped to 30 percent by the end of 2022. Investors in Japan and China hold significant shares of U.S. public debt. Together, as of September 2022, they accounted for nearly $2 trillion, or about 8 percent of DHBP.

What happens if the United States defaults on its debt? ›

If the United States defaults on its debt, it would undermine faith in the federal government's ability to pay all its bills on time, affecting the government's credit rating and unleashing massive turbulence in financial markets.

What would happen if America defaulted? ›

JL: The broader US economy will suffer, the stock market will suffer, there will be higher unemployment. People won't get critical benefits from the government. We could go into a recession. So just because the Treasury market ends up doing fine does not mean good news for the US economy.

Who owes the US the most money? ›

Over the past 20 years, Japan and China have owned more US Treasuries than any other foreign nation. Between 2000 and 2022, Japan grew from owning $534 billion to just over $1 trillion, while China's ownership grew from $101 billion to $855 billion.

What would happen if China cashed in in U.S. debt? ›

The biggest effect of a broad scale dump of US Treasuries by China would be that China would actually export fewer goods to the United States. Overall, foreign countries each make up a relatively small proportion of U.S. debt-holders.

Is China in more debt than the US? ›

The United States, holding the highest national debt globally, has a total of $31.68 trillion, representing a YoY increase of $1.3 trillion or 4.28%, reaching $30.38 trillion. Therefore, China's national debt has surged almost three times that of the United States in the past 12 months.

Who is richer between USA and China? ›

The U.S. makes up 23.93% of the total global economy, says Investopedia. The World Bank Group lists China as the second richest country in the world as of 2021, possessing a GDP of $17.734 trillion along with a GDP per capita of $12,556.3. China makes up 18.45% of the total global economy.

Which country has no debt? ›

The 20 countries with the lowest national debt in 2022 in relation to gross domestic product (GDP)
CharacteristicNational debt in relation to GDP
Macao SAR0%
Brunei Darussalam2.06%
Hong Kong SAR4.26%
9 more rows
May 11, 2023

What country does China owe most? ›

At the end of 2021, of the 98 countries for whom data was available, Pakistan ($27.4 billion of external debt to China), Angola (22.0 billion), Ethiopia (7.4 billion), Kenya (7.4 billion) and Sri Lanka (7.2 billion) held the biggest debts to China.

Why does the US owe so much money? ›

Since the government almost always spends more than it takes in via taxes and other revenue, the national debt continues to rise. To finance federal budget deficits, the U.S. government issues government bonds, known as Treasuries.

Which country has highest debt? ›

Here are the 25 countries with the highest debt-to-GDP ratios:
  • Sri Lanka. ...
  • Portugal. Debt to GDP Ratio: 114% ...
  • Cuba. Debt to GDP Ratio: 117% ...
  • Bahrain. Debt to GDP Ratio: 120% ...
  • Zambia. Debt to GDP Ratio: 123% ...
  • Suriname. Debt to GDP Ratio: 124% ...
  • Bhutan. Debt to GDP Ratio: 125% ...
  • United States. Debt to GDP Ratio: 129%
May 18, 2023

Who does the US borrow money from? ›

The federal government borrows money from the public by issuing securities—bills, notes, and bonds—through the Treasury. Treasury securities are attractive to investors because they are: Backed by the full faith and credit of the United States government.

Will China ever forgive Japan? ›

After 60 years there is still no prospect of a true reconciliation between China and Japan. The recent visit by Junichiro Koizumi, Japan's prime minister, to a war shrine in central Tokyo was condemned by the Chinese.

Will the stock market crash if the US defaults on its debt? ›

The stock market will certainly take a hit if the U.S. defaults on its debt. At moments, the losses could seem significant to anyone with investments or retirement accounts. But for those with diversified portfolios who aren't nearing retirement, investment experts advise that you stay the course.

Does the US depend on China? ›

Today, the United States imports more from China than from any other country, and China is one of the largest export markets for U.S. goods and services. This trade has helped the United States in the form of lower prices for consumers and higher profits for corporations, but it has also come with costs.

Why was the US unhappy with Japan? ›

The United States was particularly unhappy with Japan's increasingly belligerent attitude toward China. The Japanese government believed that the only way to solve its economic and demographic problems was to expand into its neighbor's territory and take over its import market.

What would happen if China surrendered to Japan? ›

If China had surrendered in 1938, Japan would have controlled China for a generation or more. Japan's forces might have turned toward the USSR, Southeast Asia, or even British India. The European and Asian wars might never have come together as they did after Pearl Harbor in 1941.

Does Japan rely on China? ›

Bilateral Relations:

At the same time, the relationship with China is one of Japan's most important bilateral relationships, and the two countries have close economic relations, as well as people-to-people and cultural exchanges.

Has China ever won a war against Japan? ›

When Japan was finally defeated in 1945, China was on the winning side, but lay devastated, having suffered some 15 million deaths, massive destruction of industrial infrastructure and agricultural production, and the shattering of the tentative modernization begun by the Nationalist government.

Who keeps the money when a stock goes down? ›

When a stock tumbles and an investor loses money, the money doesn't get redistributed to someone else. Essentially, it has disappeared into thin air, reflecting dwindling investor interest and a decline in investor perception of the stock.

Can you owe money if a stock crashes? ›

The price of a stock can fall to zero, but you would never lose more than you invested. Although losing your entire investment is painful, your obligation ends there. You will not owe money if a stock declines in value.

Will the stock market recover if it crashes? ›

However, once the market starts to turn, it can recover quickly. The average recovery time for a correction is just four months! That's why investors with truly diversified portfolios may consider staying investing for the long-term.


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