Ultimate gift for China if US defaults
Should the US fail to raise the debt ceiling and default on its financial obligations, it would be the ultimate gift to China.
President Biden held talks on Tuesday with House Speaker Kevin McCarthy, yet after an hour, McCarthy said both sides remained far apart on reaching an agreement to lift the debt ceiling. However, he added: “It is possible to get a deal by the end of the week. It’s not that difficult to get to an agreement.” Biden has previously also stated he believed a deal could be reached.
As I was quoted by MSN, City AM, Mena FN, Advisorpedia, Value Walk, London Loves Business, Funds Europe and Modern Diplomacy, amongst other media, the standoff is due to Democrats vying for a “clean” increase without conditions to pay debts stemming from spending and tax cuts approved by Congress. Whereas Republicans have stated, they won’t authorise further borrowing without an agreement to slash spending.
The US could default as soon as 1st June, which could result in global economic chaos, should the limit not be raised by Congress before this time.
It’s likely that the impact of a US default would be worse than the 2008 crash. It would cause unprecedented upheaval. Yet, to my mind, China would be a key beneficiary of the fallout.
This is because a default would result in a fall in US dollar value and a loss of confidence in the US financial system. As a result, investors would look for alternative destinations for their capital.
China would ensure it is best placed to be a more appealing investment option, attracting more international investment and capital inflows. This would subsequently bolster China’s economy and financial markets.
Should Congress not agree and raise the debt ceiling, there would be a depreciation of US asset prices, including real estate, companies, and infrastructure. China would likely make the most of this situation by purchasing these assets at discounted prices.
We expect Beijing would obtain strategic assets in sectors such as technology, energy and manufacturing, which may boost its economic and technological capabilities.
Another key advantage for China would be the strengthening of the yuan’s position. Indeed, the greenback’s status as the world’s primary reserve currency could be in jeopardy should there be a default. This would be a chance for China to promote the internationalisation of its own currency.
Beijing has long been pushing for the yuan to be used as a reserve currency and in global trade and investment, with the aim of reducing US dollar reliance. Therefore, a default would be a big help for China in this regard.
As I said previously, even if a default is sidestepped, the drama will have eroded some of the dollar’s credibility and reputation as a safe asset.
Furthermore, we believe China would take advantage of the opportunity to boost its trade relationships with other countries, provide more attractive trade terms and be seen as a reliable trading partner. This could result in additional market access and trade opportunities for Chinese companies.
As such, whatever happens with the debt ceiling negotiations between Democrats and Republicans, China is waiting in the wings to make the most of the situation.