A US debt default could spur China to diversify its multitrillion US dollar foreign exchange reserves — the world’s largest — as Beijing seeks to boost its voice in the global economy, analysts say.
A historic default would inevitably lower the value of China’s US dollar assets and have a broader impact on its economy, the second largest in the world.
Chinese officials and state media have already sounded the alarm as the deadline approaches for the divided US Congress to raise the debt ceiling and avoid a financial catastrophe.
Analysts said the heightened possibility of default is likely to cause China to further diversify its reserves — which it is already doing — and even trim holdings of US Treasuries, but they ruled out Beijing dumping its holdings.
The bulk of China’s foreign exchange reserves, which reached a towering US$3.66 trillion at the end of last month, are held in the greenback.
“If there really is a default, the Chinese government will definitely speed up foreign exchange reserve diversification, seeking safer bonds of other countries,” said Liao Qun (廖群), a Hong Kong-based economist with CITIC Bank International (中信銀行國際).
“If there is an acceleration in diversifying, there might also be a reduction in holdings [of US Treasuries],” he said. “China has a reason to do so, but of course it would be extremely difficult.”
China is the largest foreign holder of US Treasury bonds with US$1.28 trillion, closely followed by Japan with US$1.14 trillion.
Any large-scale selling of US debt by China would erode the value of its remaining holdings, analysts said, while few other asset classes anywhere in the world are large enough to park such vast amounts of cash, leaving Beijing with few practical alternatives.
In the longer term, Japan may also rebalance its portfolio a tad to diversify away from holding US government debt, said Yoshikiyo Shimamine, executive chief economist with the Dai-ichi Research Institute in Tokyo.
However, Tokyo’s political dependence on the US — for example, in its defense pact — mitigates against a sudden switch, he added.
“There is no financial instrument that is as highly liquid as US Treasuries,” he said, implying that it is difficult to see any major economy abandoning them.
Another worry for Beijing is the impact a Washington debt default would have on the US and global economies. China is heavily dependent on exports and foreign investment to maintain momentum in its own economy, which expanded 7.7 percent last year, the slowest growth since 1999.
A default “would definitely have a noticeable impact on the US economy,” said Sun Junwei (孫君瑋), a Beijing-based economist for British bank HSBC Holdings PLC.
“In this way, it would also have a negative impact on China’s economy,” she said.
Meanwhile, South Korea warned of risks of volatility in the won and stresses within its bond market as the US grapples with the threat of a default.
Prolonged tension over US fiscal policy adds to the danger of increased volatility in financial markets, the South Korean Ministry of Finance said in a report prepared for a parliamentary audit yesterday.
Bond issuance by companies with low credit ratings may wither, the report said, amid a criminal probe and financial crisis at the Tong Yang Group. South Korea will strengthen monitoring of financial markets and act quickly if necessary to curb volatility in its currency, the ministry said.
Speaking in the city of Sejong, South Korean Minister of Finance Hyun Oh-seok highlighted concern over the effect of the US Federal Reserve’s plans to reduce monetary stimulus when the US economy strengthens sufficiently.
Additional reporting by Bloomberg
Stephen Garrett, a 27-year-old graduate student, always thought he would study in China, but first the country’s restrictive COVID-19 policies made it nearly impossible and now he has other concerns. The cost is one deterrent, but Garrett is more worried about restrictions on academic freedom and the personal risk of being stranded in China. He is not alone. Only about 700 American students are studying at Chinese universities, down from a peak of nearly 25,000 a decade ago, while there are nearly 300,000 Chinese students at US schools. Some young Americans are discouraged from investing their time in China by what they see
MAJOR DROP: CEO Tim Cook, who is visiting Hanoi, pledged the firm was committed to Vietnam after its smartphone shipments declined 9.6% annually in the first quarter Apple Inc yesterday said it would increase spending on suppliers in Vietnam, a key production hub, as CEO Tim Cook arrived in the country for a two-day visit. The iPhone maker announced the news in a statement on its Web site, but gave no details of how much it would spend or where the money would go. Cook is expected to meet programmers, content creators and students during his visit, online newspaper VnExpress reported. The visit comes as US President Joe Biden’s administration seeks to ramp up Vietnam’s role in the global tech supply chain to reduce the US’ dependence on China. Images on
New apartments in Taiwan’s major cities are getting smaller, while old apartments are increasingly occupied by older people, many of whom live alone, government data showed. The phenomenon has to do with sharpening unaffordable property prices and an aging population, property brokers said. Apartments with one bedroom that are two years old or older have gained a noticeable presence in the nation’s six special municipalities as well as Hsinchu county and city in the past five years, Evertrust Rehouse Co (永慶房產集團) found, citing data from the government’s real-price transaction platform. In Taipei, apartments with one bedroom accounted for 19 percent of deals last
US CONSCULTANT: The US Department of Commerce’s Ursula Burns is a rarely seen US government consultant to be put forward to sit on the board, nominated as an independent director Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), the world’s largest contract chipmaker, yesterday nominated 10 candidates for its new board of directors, including Ursula Burns from the US Department of Commerce. It is rare that TSMC has nominated a US government consultant to sit on its board. Burns was nominated as one of seven independent directors. She is vice chair of the department’s Advisory Council on Supply Chain Competitiveness. Burns is to stand for election at TSMC’s annual shareholders’ meeting on June 4 along with the rest of the candidates. TSMC chairman Mark Liu (劉德音) was not on the list after in December last