The US Debt Crisis Has Left China Helpless.

According to participants in the Chinese market, China is certainly concerned about the US debt deadlock. But unlike the past, Beijing has little choice but to pray that its large holdings of US Treasuries can be preserved.

As the largest holder of sovereign debt in the US, the Chinese government has reason to feel anxious, but its biggest worry is not that the United States will really default on its debt.

Li Yongliang, director of DBS Vickers in Hongkong, said that the Chinese government's immediate concern is that the US debt rating may be downgraded, but they believe it is unlikely that the debt default will occur because the United States delays the increase in the debt ceiling by the Democratic Party and the Republican Party's usual trick in. (Peter Lai)

Some recent comments from Beijing support the above view.

The latest comment is that China's official English newspaper, China Daily, quoted the two Chinese government on Wednesday.

In fact, China and other Asian countries are more worried about the downgrading of the US sovereign debt rating.

Kuang Minbin Ben Kwong, chief investment officer of KGI Asia, said the dollar's weakness is also worrying, especially if the downgrade is to extend the recent decline in the US dollar, which will cause US Treasuries to depreciate sharply.

China has sought to diversify its foreign exchange reserves in addition to holding US Treasury bonds.

Li Yongliang of DBS Gundam said that since the collapse of Lehman Brothers in 2008, China has been promoting diversification of foreign reserves.

Kuang Minbin also said that the reduction of US Treasury bonds is not just the Chinese government, but also the Chinese state-owned enterprises holding US Treasury bonds.

Kuang Minbin said, the question now is whether they should speed up the pace of asset diversification.

China is restricted

In the past, China has been able to try to satisfy Washington's demands.

It is said that Beijing used pressure on Henry Paulson, the then US Treasury Secretary, in 2008 to ask him to make sure that the bondholders of Freddie Mac and Fannie Mae (one of China's main holders) will not suffer any losses. Paulson, the US Treasury Secretary, said that

But under the current circumstances, China can use much less.

Kuang Minbin said that part of the problem is that China's foreign exchange reserves are too large, and a large part of it must be invested in US Treasury bonds, because treasury bonds are among the deepest and most liquid markets in the world.

He said that there are not many options in the market, because the US dollar is still the main currency in the world.

He added that other options, including euro and yen assets, were also dragged down by serious sovereign debt concerns.

In addition, he said that unlike the case of two room bonds, the ability of the US government to deal with its debts is limited because the deadlock in debt negotiations is essentially a political issue. If it can, the White House and the US Treasury are willing to solve it.

Even if Washington can solve its debt and deficit problems unilaterally, Li Yongliang said, it is unlikely that it will be done according to China's instructions.

Li Yongliang said that since the collapse of the Lehman brothers, the mainland government has been negotiating with the United States, but the United States is not always obedient.

Next step

Kuang Minbin said, if the United States

Theoretically speaking, China may revisit its management of the RMB exchange rate, and Hongkong may consider more seriously whether or not to abolish the pegged peg linked exchange rate system, but it is too early to say what will happen.

Of course, China has been encouraging state-owned enterprises to acquire overseas assets to hedge against the loss of US dollar assets, which may be more and more.

But Li Yongliang said that if the US debt crisis did not damage much, the US Treasury bonds could still appear to be a good investment tool, and many people in Asia thought that Washington might tighten monetary policy next year, thus raising the dollar security price.