US debt ceiling deal is double-edge sword for China

Updated: 2011-08-05 15:12

By Li Xiangyang (peopledaily.com.cn)

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Unlike the southern European countries suffering from debt crises, the United States does not need tight economic policies or the financial support of international organizations and other countries, and the American people do not need to tighten their belts. As the issuer of a world currency, the United States has easily solved the debt crisis with an unreal 10-year commitment. Therefore, the dollar-centered international monetary system in the post-crisis era must be reformed, not to mention that the United States was responsible for the global financial crisis.

Although the compromise deal to raise the US debt ceiling has temporarily removed the Sword of Damocles hanging over the global economic recovery, the US debt problem remains a hidden danger in the world economy. The US debt limit has risen from 6.4 trillion US dollars nine years ago to 16.7 trillion US dollars at present. In addition, the United States has promised to cut its annual deficit over the next 10 years by more than 3 trillion US dollars.

Whether it can fulfill its promise remains to be seen. If the United States cannot tackle the massive debt through economic growth, tax increases and spending cuts, it will suffer from rising inflation, and the US dollar will continue to depreciate.

The United States raising its debt ceiling is a double-edged sword to China. In the short term, the US economy avoids suffering from a "double dip" and introduces the third round of the quantitative easing policy, which will reduce the global financial market risk. This is conducive to China's steady economic growth because the United States is one of China's most important export markets and is also conducive to the security of China's U.S. dollar assets and keeps the exchange rate of the RMB against the U.S. dollar stable.

In the long term, the current dispute between Republicans and Democrats on the debt ceiling warns China that the United States will ignore the interests of creditors for the needs of domestic political struggles.

The United States is facing a dilemma between default and increasing debt. If one day the United States meets the domestic political obstacles on cutting debt and is facing a choice between default and passing on debt, China's circumstances will be far worse than now.

It is undoubted that changing the existing pattern of intensively holding US dollar assets is necessary. However, it is more important to change the trend of continuing to increase US dollar assets in the future, which requires fundamental adjustments in the economic development model.

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