‘CHINA STILL FACES RISKS EVEN WITH DEBT DEAL’

Beijing is one of the world’s biggest holders of US bonds and investments, and turmoil could affect entire global financial market, analysts warn

A tentative deal between the White House and Republicans to raise the US debt ceiling could bring temporary relief to the global financial market but there was still the risk of collateral damage, Chinese observers have warned.

US President Joe Biden and House Speaker Kevin McCarthy reached an agreement in principle on Saturday on a deal that is believed to include a two-year debt limit increase and a cap on non-defence spending.

The agreement still needs the approval of lawmakers of both parties before the Treasury is projected to run out of cash to pay its bills on June 5. McCarthy said he planned to meet Biden again and release the legislative text before voting on Wednesday.

The deal is expected to avert an unprecedented credit default that many worry could be catastrophic to a global economy already battered by banking turmoil, prolonged high inflation and fallout from the Ukraine war.

It would also ease concerns in China where the post-pandemic economic recovery seemed to lose momentum last month.

“In the short-run, the alarm has been lifted, but the disagreement between the two parties and its impacts on the US and global economy, especially on US dollar assets, are actually not completely eliminated,” Renmin University finance professor Zhao Xijun said.

The deal is seen as a victory for Biden but the crisis has highlighted the deep partisan antipathy in the United States and called the government’s credibility into question.

“As long as the interests of the two parties are not aligned, disputes over the debt ceiling will re-emerge – and more frequently,” Zhao said. “The debt limit has increasingly become a contentious issue between the two parties, which may be less willing to compromise in the future.”

The weeks-long stand-off in Washington raised deep concerns in Beijing, with the US a top destination market of China’s overseas securities investment.

According US Treasury Department data, China owned US$859 billion in American debt as of January. It is the largest foreign holder only after Japan.

“China is very concerned about the risks associated with the debt issue because China holds a large number of US bonds and investments, and turmoil in the US credit market would mean pressure for not only the US financial market but also for the US dollar,” Zhao said. “In this sense, the entire international financial market would be affected.”

Shi Yinhong, an international relations expert at Renmin University, warned there were still uncertainties about how the deal would be sold to the Republicanled House and Democraticcontrolled Senate.

“Time is running out and it is unlikely both houses of Congress will reject the deal,” Shi said. “But if the two parties fail to reach a deal before the default deadline, there will be a really big blow to China and Japan.”

Chen Fengying, a senior researcher at the China Institutes of Contemporary International Relations in Beijing, said the US’ debt ceiling issue was a political, rather than economic, issue.

The debt ceiling is the cap on money the federal government can borrow – via bills and bonds – to fulfil its financial obligations. Since 1960, Congress has acted 78 times to raise, temporarily extend, or revise the definition of the debt limit, and the US has never intentionally defaulted on its obligations because of the debt limit.

Tan Yaling, head of the Beijingbased China Forex Investment Research Institute, said the US debt crisis would have a limited impact on China. The bigger concern was the large gap in interest yields between the two countries.

“The higher yield of US treasuries than Chinese government bonds will trigger hedges and speculative action [that will bring risks to Chinese financial markets],” Tan said.

Pang Zhongying, chair professor in international political economy at Sichuan University, said that despite the bitter rivalry between the two countries, a debt ceiling deal in the US would be good news to China, too.

“Any financial turmoil in the US would inevitably have an impact on China,” Pang said. “China and the United States are not completely decoupled, so a debt limit deal is in the interests of China and the world.”

The higher yield of US treasuries than Chinese government bonds will trigger hedges TAN YALING, FOREX EXPERT