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The People's Daily, People's Republic of China

China Still Has No Choice But to Hold Dollar Assets


Given the global turmoil caused by American domestic politics, should China relive itself of its astronomical dollar-denominated assets? According to this article from China's state-run People's Daily, despite its wish to break out of the current global financial paradigm, Beijing has no choice but to continue to safeguard the value of the dollar by holding such assets.


By Li Xiangyang


August 3, 2011


People's Republic of China - The People's Daily - Original Article (English)

President Barack Obama: Will the U.S. debt ceiling agreement damage his chances for another term?


FINANCIAL TIMES VIDEO: Weak growth shakes investors around the world, Aug. 4, 00:07:09RealVideo

The topsy-turvy debate over raising the U.S. federal debt ceiling is finally over after a compromise between Republicans and Democrats. The Democratic Obama Administration has removed the political obstacle of debt default until after the next general election in 2012, and the Republican dominated House of Representatives secured a promise for cuts in government spending over the next decade.


By making use of the interests of global creditors, the two parties threatened one another, and offered a preview of the 2012 polls. Meanwhile, trouble on global financial markets and the global economic recovery in general has been temporarily reduced.


The U.S. Federal Reserve's second round of quantitative easing ended a month ago, and the newly released U.S. second-quarter growth rate fell far short of investor expectations, coming in at just over one percent. Debates about the risk of a second U.S. economic slump and rumors of a third round of quantitative easing are now being heard.


Given the situation, raising the debt ceiling undoubtedly boosts investor confidence. Even if U.S. economic growth loses momentum, a third round of quantitative is likely in the offing.


The confidence of investors was already particularly fragile in the first half of the year due to the sovereign debt crisis in Europe. So world financial markets were in urgent need of the debt ceiling deal. This is why governments, international economic organizations and even Wall Street all put pressure on the two U.S. parties.


Global expectations of a U.S. debt deal show that the U.S. dollar remains the leading global currency - even as Republicans and Democrats ignore the interests of creditors, using the issue to coerce one another into submission. Unfortunately, creditor nations have no choice but to increase their holdings of U.S. debt.


Unlike the countries of southern Europe, the American people don't need to tighten their belts and the U.S. doesn't need to tighten its economic policies or seek the financial support of international organizations or other nations. As the issuer of the global currency, the United States has been able to resolve its debt crisis by agreeing to a fantastical 10-year commitment. This is to say nothing of the fact that the United States was responsible for the global financial crisis in the first place. That is why today's dollar-centered global monetary system must be reformed in the post-crisis era.



Guardian, U.K.: S&P Strips U.S. of its AAA Credit Rating
Die Zeit, Germany: Wealthy Americans Get Off 'Scot-Free'
Die Welt, Germany: The Diminishing Power of Money
O Globo, Brazil: Deal on U.S. Debt Ceiling Shows American 'Strength'
Yomiuri Shimbun: For World's Sake, Obama Must 'Provide Leadership'
CRI, China: U.S. Must Consider 'Defects' in its Democratic System
UNT, Sweden: U.S. Must Choose Practical Patriotism Over Party Tactics
FTD, Germany: Take Decisive Action on Debt Ceiling! Do it, Barack!
La Jornada, Mexico: The 'Grand Debt' of U.S. Families
Jornal Do Brasil, Brazil: American Default and the End of 'Zero Risk'
The Telegraph, U.K.: World Needs America to Come to its Senses
El Pais, Spain: Playing Chicken is the World's Newest Sport
Mainichi Shimbun, Japan: U.S. Must Prevent Another 'Made in U.S.' Disaster
Yomiori Shimbun, Japan: U.S. Lawmakers Should 'Stop Playing Political Games'
Yezhednevniy Zhurnal, Russia: The U.S. and Soviets: Pyramid Builders to Raiders
Frankfurter Rundschau, Germany: 'Radical' Republicans Threaten U.S. with Ruin
Tiscali Notizie, Italy: The Fiscal Decline of the 'Apocalypse'
News, Switzerland: Notion: 'Pay Politicians Based on Performance'
Salzburger Nachrichten, Austria: Debt Ceiling Attack By Republicans 'Backfires'
Gazeta, Russia: America's Astonishing 'Battle for the Ceiling'
People's Daily, China: U.S. Game of Chicken Threatens Creditors and Economy
Die Zeit, Germany: U.S. Risks 'Plunging World' Into New Financial Crisis
O Globo, Brazil: Global Economy Hangs on 'Mood' of U.S. Voters
The Telegraph, U.K.: Down on the Fourth of July: The United States of Gloom
Financial Times Deutschland, Germany: For Americans, a Dour Independence Day
Financial Times Deutschland, Germany: Who Cares about the U.S. Economy?
Folha, Brazil: U.S. Conservatives Threaten to Plunge U.S. into 'Lost Decade'


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Although the U.S. debt ceiling compromise has temporarily removed the Sword of Damocles hanging over the global recovery, the U.S. debt problem remains a danger. The U.S. debt limit has risen from $6.4 trillion nine years ago to $16.7 trillion today. In addition, the United States has promised to cut its annual deficit by more than $3 trillion over the next 10 years.


But whether it can fulfill this promise remains to be seen. If the U.S. can't tackle its massive debt through a combination of economic growth, tax increases and spending cuts, it will suffer from rising inflation, and the dollar will continue to depreciate.


For China, the lifting of the U.S. debt ceiling is a double-edged sword. In the short term, the U.S. economy may avoid a "double dip" recession and will introduce a third round of quantitative easing, which will reduce global financial market risk. As the United States is one of China's most important export markets, this is conducive to steady economic growth here. It is also conducive to the security of China's dollar assets and keeps the exchange rate of the yuan against the U.S. dollar stable.



In the long term, the dispute between Republicans and Democrats on the debt ceiling is a warning to China that the United States will ignore the interests of creditors for the sake of domestic political battles.


The U.S. faces a dilemma: to default or increase its debt. If due t domestic political squabbling, the United States fails to cut its debt and must choose either default or the need to pass on its debt, the circumstances for China will be far worse than they are today.


There can be no doubt about the existing policy of intensively holding U.S. dollar assets. But it is even more important to find ways to change this policy, which is likely to require fundamental changes to China's model of economic development.


*Li Xiangyang is director of the Asia-Pacific Institute under the Chinese Academy of Social Sciences

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[Posted by WORLDMEETS.US Aug. 5, 5:18pm]


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