Debt deal a temporary fix

Updated: 2013-10-18 11:21

By Wei Tian in Shanghai, Pu Zhendong and Chen Jia in Beijing, and Chen Weihua in Washington (China Daily USA)

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The US government reopened on Thursday after a last-minute deal late Wednesday night in Washington prevented the government from defaulting on its loans. The webcam for the giant panda at the National Zoo in Washington has resumed operation although the zoo will not open until Friday.

However, experts said that the debt-ceiling crisis will rear its head again and China must refrain from holding massive US dollar assets.

The US Congress passed a bill on Wednesday night to extend the nation's borrowing authority and end a 16-day partial federal government shutdown just two hours before the deadline, beyond which the US Treasury had warned it might not be able to pay its bills.

But the measure adopted by Congress only funds the government until Jan 15 and allows it to borrow freely until Feb 7.

Beijing said it welcomed the progress in resolving the issue.

"The US is the largest economy in the world, and the proper resolution of this issue serves not only its own interests but also world economic stability and development," Foreign Ministry spokeswoman Hua Chunying told a regular news briefing in Beijing on Thursday.

Her comments came as China's Dagong Global Credit Rating downgraded the US sovereign rating to A- from A with a negative outlook.

On Thursday, the US stock market closed at an all-time high. The Standard & Poor's 500 rose 11 points to close at 1,833, surpassing its previous high of 1,725 on Sept 18. The Nasdaq rose 23 points to 3,863. But the Dow Jones Industrial Average dropped 2 points to close at 15,371, due largely to disappointing earnings news from IBM, Goldman Sachs and UnitedHealth. It was just 305 points below its own record close.

Shares in Tokyo, Singapore and Sydney had gained slightly on Thursday. But the dollar and European shares fell on Thursday as market relief at the last-minute deal gave way to worries over the economic impact of the 16-day government shutdown and the prospects for a re-run early next year.

Chinese observers warned that another crisis is possible within months, and the uncertainties will add pressure to the appreciation of the yuan and increase the risks of China's huge reserves of US debt.

The US government has raised its debt ceiling nearly 80 times since 1960.

"The issue (of debt ceiling) is not yet fundamentally resolved. It will come back in three months," said Li Daokui, a professor at Tsinghua University and former central bank adviser.

"Countries will reduce their holdings in US Treasury bonds, pushing up gold prices and causing the renminbi to rise further," Li said, adding that the credit ratings of US bonds might be downgraded in the coming days.

On Thursday, President Barack Obama said the last few weeks had inflicted completely unnecessary damage on the US economy. "We don't know yet the full scope of the damage, but every analyst out there believes it's slowed our growth," he said.

"But probably nothing has done more damage to America's credibility in the world, our standing with other countries, than the spectacle that we've seen these past several weeks," Obama said.

"We know that just the threat of default, of America not paying all the bills that we owe on time, increased our borrowing costs, which adds to our deficit," he said.

US news media have followed reactions about the government shutdown and possible debt default from China, the largest foreign holder of US Treasury bonds. An op-ed piece by a writer for Xinhua News Agency calling for "de-Americanized" world order has triggered much debate.

He Weiwen, a co-director of the China-US/EU Study Center at the China Association of International Trade, said a long-term solution to the US debt issue would be to raise its domestic corporate income tax, but that doesn't seem to be a feasible option in the near term.

He said China has to continue diversifying its $1.28 trillion foreign exchange reserves into other assets such as gold and bonds of other nations.

China also needs to speed up opening its capital account to ease upward pressure on the yuan and allow more individual holdings of dollar assets, he said.

Another possible impact on China would be on exports as the US government is likely to reduce spending, said Alfred Schipke, the International Monetary Fund's senior resident representative in China.

Schipke said the priority for China is to advance financial reforms to prevent a further buildup of risks, and foster a more efficient allocation of investment, and boost household capital income.

Christine Lagarde, head of the IMF, urged the US "to reduce uncertainty surrounding the conduct of fiscal policy by raising the debt limit in a more durable manner".

Dagong estimated that the depreciation of the US dollar had caused a loss of $628.5 billion to foreign creditors since the US government began to monetize its debts by using the quantitative easing policy to maintain its solvency.

"State debt is an important benchmark of a country's financial market. A default will disrupt financial stability, which is suicidal for Americans," said Zhang Yuyan, director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences.

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(China Daily USA 10/18/2013 page1)