How will China be harmed if the United States defaults on its debt?

After the United States exceeded the legal debt limit on January 19, by reaching $31.4 trillion, the US Treasury Department began activating exceptional measures to continue paying government obligations. These measures are financial accounting tools that limit some government investments to be able to continue paying their bills. But without raising the ceiling by next June.

In a report, Foreign Policy magazine warned of the consequences of the United States' failure to pay its debts, and the resulting global economic crisis that cannot be left behind.

And given that the US debt is what drives the entire global economy, the consequence may be a massive global economic crisis, according to the description of the report, which asks: How will China - which is the second largest economy in the world - survive the collapse if it occurs?

He also questioned whether Washington's debt default would give Beijing an opportunity to create a new global financial system that is less dependent on the dollar.

Although the US default on its debt is unlikely, US House Speaker Kevin McCarthy said yesterday, Sunday, that he will meet President Joe Biden the day after tomorrow, Wednesday, to discuss raising the federal debt ceiling while putting government spending under control, adding that the Republicans will not allow the United States to default. to pay off its debts, according to Reuters.

The American Journal report says that even if Congress fails to reach an agreement, President Joe Biden's administration has options to prevent default, from accounting tricks to the decision to ignore the debt ceiling.

And in the event of a default, interest rates on US Treasury bonds will rise dramatically because investors will demand a higher price in exchange for taking the risk of not getting their money back, and even those bonds may not be usable as a guarantee of payment because their basic value will not be clear, says the Foreign Policy report. .

How will China be affected?

According to the American Journal report, any collapse of the global economy will cause great harm to China, although its economy is performing slightly better than most other countries' economies, because it runs a closed financial system that depends mainly on domestic savings and is protected from fluctuations resulting from global financial instability, from by imposing capital controls.

However, the impact of the US default on its debt remains "devastating" - the report adds - as the lack of trade financing and the collapse of global demand during the 2008-2009 crisis led to a decline in Chinese exports by about 20%, and the loss of more than 20 million workers their jobs. .

The report believes that the Chinese government could have dealt with the crisis 15 years ago by launching a huge debt-financed economic stimulus program, because the country's debt level at 140% of GDP was relatively low and it still had great needs for infrastructure and housing.

Today, the room for maneuver is much narrower. China's debt has risen to nearly 300% of GDP, and the country has built far more infrastructure and housing than demand.

Although the economic consequences for China of a US default are severe, they are unlikely to threaten the authority of the Chinese Communist Party.

China operates a closed financial system that relies mainly on domestic savings (Shutterstock)

Can China create an alternative financial system?

On the possibility of China establishing an alternative financial system based on its local currency, in the event that the United States defaults, the report believes that the Chinese government bond market is not large enough, or it does not have sufficient liquidity, or it is not integrated with the rest of the world to the extent that it can be It replaces US Treasury bonds.

The daily trading volume of the Chinese government bond market is $30 billion, or about 5% of the average treasury bond market. Those efforts did not bear fruit, according to the report.

And if a country wants to create an alternative system for the US bond market and for the world's main currency (the US dollar), the problem it will face is that it has to bear the risks involved in this step, according to the report.

The Foreign Policy report believes that the reason why the US Treasury bond market is an indispensable part of the global financial system is that the United States is ready to take financial risks that no other country dares - even if it is as large as China - and has proven over the past decades that it is able to Manage it safely.