US-China relations have taken a knock as Beijing loses patience over Washington's inability to agree a debt-ceiling plan. As America's largest creditor, China could be left holding the bag if the US defaults on its debt at the beginning of August.
Recently the US secretary of state, Hillary Clinton, rushed to reassure Asian leaders that America's debt debate would be settled on time and no default would take place.Now Beijing seems to be losing patience as the situation in Washington over raising the country's debt ceiling drags on.The Republicans and Democrats have until next Tuesday to find a compromise on their rival budgets or risk a default and a credit rating down grade.Meanwhile, Daniel McDowell, political economy researcher from the University of Virginia says that if the debt-ceiling agreement is reached, markets will continue to lend to the United States. “Once a debt-ceiling agreement is reached, markets will continue to loan to the United States, because frankly the US debt market is the deepest and the most liquid market. China has a $15-billion trade surplus with the United States, from that quarter alone. They have to do something with this cash. And frankly the US debt market is the best option they have,” McDowell says.But if the US fails to reach the agreement, he says, it will significantly affect country’s reputation worldwide. “I think it will be a very significant blow,” McDowell says. “Defaulting on its debt… It will be the third strike against the US in three years. It will make it look more irresponsible. It is going to be harder for the United States to go to China and say: ‘You need to allow your currency to appreciate.’ China will say: ‘Well, maybe should not default on you debt.’…Once the United States defaults it is pretty hard to look at other countries and say you need to fix your own problems.”
Peter Schiff from the investment company EuroPacific Capital says that America cannot afford bad relations with China as Beijing could dump the US dollar as its main reserve currency.“Beijing holds the cards. The real problem for China is that there is no way that America can pay back the money,” Schiff says. “I do not think we [the US] are going to default. I think we are going inflate, which is just as bad. But we are going to raise the debt ceiling. The problem is that – the debt not the ceiling. The ceiling maybe a solution, but unfortunately it is going to be raised…The sooner the Chinese stop enabling the sooner we as Americans could repair the damage. And what is going to happen when the dollar collapses is that Americans are going to see a bad reduction on their standards of living,” Schiff concluded.
Joe Weisenthal, from The Business Insider says China should be weary because they have too much at stake.“There definitely will be a lot of nervousness all around the world. And China has been reasonably nervous. Not necessarily because they are going to miss interest payment, but because they have so much invested economically in the United States and are making them looking like fools. And they are wondering what kind of partner economically they have, and whether they should be holding so many dollar assets," Weisenthal said. "So, it is not a matter they are going to miss interest payment, it is more just in the long-term, mid-term, DC is really embarrassing itself.”