US decision to lift debt limit welcome, but . . .

BEIJING. — The US decision yesterday to once again lift its debt limit has been welcomed but risks remain, according to Chinese financial experts. The US congress passed a deal to lift the government’s borrowing limit, in an effort to pull the country from the brink of a debt default and end the protracted government shutdown.

With a mammoth US$1,28 trillion of US treasury bonds in hand, China is the world’s largest owner of US debt and the risk it faces is possibly the greatest.

China welcomed the resolution of the US debt ceiling deadlock, which Foreign Ministry spokeswoman Hua Chunying said yesterday “not only serves the United States’ own interests but also contributes to world economic stability.”

However, experts have taken the resolution with a pinch of salt and warned of future risks.
“How the fiscal showdown was played out has been within our expectations. After all, it is not the first time for the US to raise the debt limit,” said Tan Yaling, president of the China Forex Investment Research Institute.

“Recent years have witnessed such scenarios, with the American debt crisis in 2011, the so-called fiscal cliff and the recent debt default risk coupled with the government shutdown. These are but variations of the same theme — the US government is distracting the world’s attention from its real intention to mobilise resources for its own development,” Tan said.

“They always end up with an elevated ceiling,” he added.
Over the past two weeks, the possibility of a default from the world’s No.1 economy has created concern among the global community. Any economic upheavals on American soil are always likely to reverberate to other countries.

“A debt default would not only harm the US’ reputation but also derail the global economic recovery. China hopes and believes that the US is able to solve its debt crisis timely to aid the global recovery and financial stability,” said Shen Danyang, spokesman of the Ministry of Commerce, in a separate briefing yesterday.

Though the Democratic and Republican parties have made predictable compromises and reached an agreement, experts argue the US debt risk will loom since its debt dependence system is unlikely to change.

The debt dependence is what has propped up its excessive consumption, said Zhang Monan, an economist with the State Information Centre.
Such an over-dependence on foreign countries should be reversed if the US cares about sustained development of its own and the world economy, analysts have said.

“The fundamental issue remains unsolved; a crisis like this could happen again in, say, three months,” said Li Daokui, a former advisor to China’s central bank, who predicted an imminent downgrade for the US debt.

To avert risks linked to its weighty investment in the US, China should push for a diversified foreign exchange portfolio, according to financial expert Zhao Qingming.

Debt default could lead to a steep devaluation of the US dollar and leave Chinese exporters exposed to greater risks, leading to a contraction in both imports and exports, Shen Danyang said. — Xinhua.