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

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.

"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.

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.

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.

“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.

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."

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%.

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