The Vice Foreign Minister of China, Zhu Guangyao, held a press conference. He told reporters that the U.S. government has a responsibility to get the issue of the debt ceiling solved before the October 17 deadline.
“We ask that the United States earnestly takes steps to resolve in a timely way the political issues around the debt ceiling and prevent a US debt default to ensure the safety of Chinese investments in the United States.” He added: “This is the United States’ responsibility,” he added.
While it is understandable that the Chinese central bank, the People’s Bank of China, should issue such a statement, it is peculiar that someone with the Foreign Ministry should. Presumably, he speaks for the national government in some way, but as to what the government plans to do if the dispute extends beyond October 17, he did not say.
The government could not get rid of its holdings of $1.77 trillion in U.S. government debt. Hong Kong holds an additional $120 billion. If it attempted to sell this many bonds and T-bills at one time, the market would not purchase it without establishing a steep discount. But that is another word for higher interest rates.
High interest rates would threaten the U.S. economic recovery. So, the Federal Reserve might create more money in order to buy this debt to force rates back down. That would lower the value of the dollar, which would mean U.S. buyers would buy fewer goods exported from China. That would disrupt China’s export-driven economy.
So, it is not clear what China can do about any default on the federal debt. If the central bank cannot sell this debt without suffering financial consequences, China finds itself a paper money tiger.
The Chinese official said that the Congress must settle the debt ceiling debate before a formal default takes place. He neglected to add these words: “Or else the People’s Bank of China will take the following steps.” These are crucial words. The words “or else” let your listener assess the consequences of not following your order. It converts an order into a suggestion.
Offering a suggestion to Senators, Members of Congress, and President Obama seems a bit futile at this point. They are tied up at the moment.