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.
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.
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.
Posted
by WORLDMEETS.US
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
