Tuesday, October 8, 2013

It's the US's responsibility to protect the interest of its creditors. The U.S. government should take "decisive and credible steps" to avoid a debt crisis and ensure the safety of Chinese investments. We hope the US will learn from history.

Zhu Guangyao

Said : Zhu Guangyao, Vice-Minister of Finance, while calling on the US to stay solvent to ensure the safety of massive Chinese assets, as reported in the Communist party newspaper People's Daily of October 8, 2013. This was the first official comment to the US government shutdown from China. China is US's biggest creditor holding $1277.3 millions worth of Treasury Securities as of the end of July, according to the US Treasury data. Next is Japan owning 1135.4 millions of US debt. The U.S. government should take "decisive and credible steps" to avoid a debt crisis and ensure the safety of Chinese investments, Zhu said.

In a press conference, Zhu, who indicated that his government is in constant contact with U.S. policymakers, expressed his concern about the US government shutdown and the fiscal deadlock and said : "it's the US's responsibility" to protect the interest of its creditors. The US Treasury Department has already set Oct 17 as the deadline before which it will run out of cash. Unless Congress authorizes it to borrow more before Oct 17, the US faces insolvency for the first time in its history. US government bonds are regarded as the pillars of global financial markets and a default will send shock waves across the globe. "We hope the US will learn from history," Zhu added. 

US government bonds are considered risk free across the globe. A default would push up bond yields worldwide, make borrowing harder, freeze liquidity and eventually plunge the world economy into recession once again. However, China Daily has also quoted He Weiwen, co-director of the China-US/European Union Study Center at the China Association of International Trade, saying that the possibility of a US default is slim. According to He, the debt ceiling issue and recent government shutdown are mainly a result of disputes between Democrats and Republicans, and such disputes have become more regular in recent years. But the two parties will eventually work out a conciliatory plan, he said. However, He Weiwen believes that a larger risk China should be wary of is the possible tapering off of the quantitative easing by the US Federal Reserve, which could lead to possible capital flight from emerging economies, even though the US has promised to consider the spillover effect on other countries when making such a move. Defending Zhu's remarks, he said : "It's right, though, for Vice-Minister Zhu to make such a stance to urge the US to protect China's interest."
Taro Aso

Reuters, in its news report today, has revealed that "Japan's finance minister, Taro Aso, also pressed the United States to quickly resolve its political deadlock over government finances to avoid a fiscal crisis that could damage the global economy." The news report has quoted Taro Aso telling reporters after a cabinet meeting that "The U.S. must avoid a situation where it cannot pay (for its debt) and its triple-A ranking plunges all of a sudden. The U.S. must be fully aware that if that happens the U.S. would fall into fiscal crisis.

As per the official data, U.S. liabilities to foreigners reported by U.S. banks were recorded at $4.8 trillion in June 2013, an increase of $240 billion from year-end 2012. U.S. banking liabilities include foreign holdings of U.S. short-term securities but exclude foreign holdings of U.S. long-term securities.

Besides China and Japan, other major holders of US Treasury Securities are : Brazil  ($256.4 billions); Taiwan ($185.8 billions); Switzerland ($178.2 billions); Belgium ($167.7 billions); United Kingdom ($156.9 billions); Luxembourg ($146.8 billions); Russia ($131.6 billions); Hong Kong ($120.0 billions); Ireland ($117.9 billions), and others.

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