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By Zhu Shanshan As lawmakers in Washington remained deadlocked over whether to extend the federal government's credit line, US government debt hit its ceiling, spelling potential trouble for investments by China, its biggest creditor. According to US figures, China holds around 7 percent of the country's total debt, putting it in the firing line of any consequences should the US default, analysts warned. US Treasury Secretary Timothy Geithner declared a "debt issuance suspension period" in a letter to lawmakers Monday to stave off the federal debt limit until August 2. "I have determined that a ‘debt issuance suspension period' will begin today, May 16, 2011, and last until August 2, 2011, when the Department of the Treasury predicts that the borrowing authority of the US will be exhausted," Geithner said in the letter. The US reached the limits of its borrowing authority as its government debt hit the legal ceiling of $14.294 trillion. Unlike many other developed countries, the US must obtain legislative approval to raise the ceiling. Congress has been squabbling over an agreement for weeks, but the Republicans are stonewalling by saying any such deal must also cut spending and tackle broader fiscal burdens such as healthcare. Democrats are taking the opposite stance, calling for tax hikes to be part of the solution for the deficit. Senior officials from the Treasury Department warned that should Congress be unable to quickly raise the limit, investors would punish the country. "We are talking about a unique and fragile asset of the US – the full faith and credit idea," Neal Wolin, deputy Treasury Secretary, told the Financial Times. "And certainly in the current context of the global recovery and other headwinds, this is not something we can afford to let happen, or to let people think might happen." Without congressional action, the Treasury Department will be removed from bond markets and the government would eventually default on its obligations of repayment, which would have tremendous repercussions worldwide. China trimmed its holding of US treasury securities in March for the fifth-straight month to $1.145 trillion, the Treasury Department said Monday, but this data shows it clearly remains the largest foreign holder of US government debt. Investors' confidence toward US bonds, shored up by its currency's security and robust demand, provides the US with sufficient capital support to cover its debt, said Shanghai Securities News. According to International Finance News, the money supply in the US outpaced its GDP growth, which lent a false appearance of recovery. Song Guoqing, a professor of macroeconomics at the China Center for Economic Research at Peking University, told the Global Times that China will have few options if Congress does not find an effective solution. "To be on the safe side, China should split its debt investments. Authorities have begun taking actions to that end. In the meantime, China should gradually adjust its foreign exchange policy and manage the trade surplus so as to reduce the holding of US debt," Song said. Despite great damage hidden in the crisis, Song said it seems highly unlikely that the US would not repay the bonds as this would trigger a broader financial crisis than the one in 2008 and would threaten the integrity of the entire global financial system. The worst scenario is to churn out greenback to pay the debt. |
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