Why China's concerned over US debt stalemate | Asia Pacific

Why China's concerned over US debt stalemate

Why China's concerned over US debt stalemate

Posted 29 July 2011, 21:52 AEST

China has come out strongly to criticise US politicians over the extended stalemate over the US debt ceiling.

The crisis has entered another day as the Republican Leader John Boehner was forced to delay a vote on his plan because of a lack of support within his own Party.

Any solution appears to be fading just days ahead of next week's deadline before the US government runs out of cash to pay its bills.

Conservative Republican politicians are refusing to approve any plan which involves lifting the 14 trillion dollar debt limit or raising taxes, insisting instead on heavy spending cuts.

Correspondent: Karon Snowdon

Rand Paul, Tea Party Republican; Zuo Xiaolei, chief economist, Galaxy Securities; Democrat Harry Reid, US Senate Majority Leader; Yukio Edano, Chief cabinet secretary of Japan; Christine Lagarde, Managing Director, International Monetary Fund

SNOWDON: Republican leader and House speaker John Boehner met indiviually with Republicans to urge them to accept his plan to avoid a default for at least six months. They would have none of it. The radical Tea Party has enough numbers to outnumber more moderate Republicans who might see some value in compromise.

Rand Paul, a member of the Tea Party Republicans opposes any increase in the debt.

PAUL: There is a certain amount of good and evil up here in the sense that I think it is evil to put these bills onto the next generation and not pay 'em now. The reason I'm against the Boehner plan and against the Reid plan is both of them will add 7 to 8 trillion dollars of debt over the next 10 years.

SNOWDON: The politicial crisis confronting the US is enough to worry the world, but the economic crisis that might result from a US default has it more worried. It would raise interest rates and dampen fragile economic growth beyond the US.

In China, the state run Xinhua news agency says the world's largest economy has been kidnapped by dangerously irresponsible politicians. "Developing economies would suffer a traumatic blow, ....and the world economy would plunge into yet another recession it said.

China is worried about a loss of value in its US dollar assets where it has invested perhaps as much as two thirds of its 3 trillion dollars of its foreign exchange reserves.

There's been no further official comment but in China investors are also hoping a last minute solution is found..

Zuo Xiaolei, is chief economist for Galaxy Securities.

"The whole world, including China, is expecting the two ruling parties of the US can reach an agreement to tackle the debt crisis together at the last minute. ..... default is not in the United States' interests, and also it will harm the interests of other countries," he said

A vote to approve a lifting of the 14 trillion dollar debt has in the past been routine ...and its happened dozens of times.

It first has to pass the Republican dominated House and then the Democrat-run Senate. The latest plan by Republican leader John Boehner -- even if acceptable to his fellow Republicans has been lost in the Senate before it even gets there.

Democrat Harry Reid is the US Senate Majority Leader.

REID: It will be defeated. They know that. No Democrat will vote for a short-term band-aid approach that would put our economy at risk and put the nation back in this untenable situation that we are in today just a few short months from now.

SNOWDON: The threat of a first ever US default has safe haven and commodity currencies the yen and the Australian dollar rising strongly against a falling US greenback. That's concerning exporters in both countries and its being felt in falling stock markets through the region.

Japan's Chief cabinet secretary Yukio Edano is showing the government's concern for the fragile Japanese economy.

"All the ministers, without exemption, are taking extreme interest in the dollar/yen rate and monitoring the levels..." he said.

Meanwhile, the International Monetary Fund's Managing Director Christine Lagarde says a missed deadline would be very difficult and very dramatic.

LAGARDE: So to have the lead economy uncertain about its debt ceiling is quite worrisome. And if you were to take it further, clearly there would be - there would be consequences in the rest of the world, not just in the United States.

SNOWDON: As the August 2nd deadline looms and with it, a disaster in some people's assessment, the US Treasury is said to be working on a plan B. The US can find ways other than borrowing, to pay its bills for a short time but the damage in even a technical default might be hard to recover from.

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