Deal or no deal, the US Congress’ dance with default impressed policymakers and investors in China and Japan with just how vulnerable their own economic revival plans are to the next political tantrum on Capitol Hill.
The 11th-hour agreement on Wednesday between Congressional Republicans and Democrats to raise the limit on US government borrowing and end a 16-day government shutdown also averted a default on US Treasury bonds that had threatened the global economy and financial system.
But Congress gets another chance to hold US creditworthiness hostage early next year ahead of a new February 7 deadline to approve a debt ceiling increase.
“We’re glad a deal has been struck,” said a Japanese policymaker, who spoke on condition of anonymity. “But the uncertainty will remain and it will be the same thing all over again early next year.”
He and other Japanese officials say they have already developed contingency plans that include flooding Japan’s banking system with cash to keep markets functioning however panicked investors become. And analysts say China, whose Communist leaders are due to hold a key policy meeting next month, may step up a push for global acceptance of its currency, the yuan or renminbi, as an alternative to the US dollar in international trade.
“They might actually consider accelerating the process,” said Vincent Chan, head of equity research at Credit Suisse in Hong Kong. “You strengthen the case for making the renminbi a genuine international currency, because the Americans are unreliable.”
Perhaps no two economies outside the US have more at stake in Washington’s recurring drama than Japan and China.
Not only are they the second- and third-largest economies, but they lend Washington more money than any other single nation.
China held $1.28 trillion in US Treasury securities at the end of July and Japan owned $1.14 trillion. A default would likely have devastated the value of their holdings.
More than that, though, both nations have adopted policies to revitalise their own economies that to some extent rely on the improving economic appetite, stable currency and increasing indebtedness of the world’s largest economy.
The uncertainty will remain and it will be the same thing all over again early next year
China is trying to deflate a dangerous credit bubble and wealth imbalances with a series of reforms that include slowly easing controls on moving money into and out of the country and allowing its currency to gently appreciate.
Analysts predict investors faced with a US default would try to sell dollars for yuan, forcing China’s central bank to either buy up dollars at a time when the government issuing them is not honouring its obligations or allow a rapid increase in the yuan’s value that would hurt exports and worsen the country’s credit bubble.
Japan, meanwhile, is trying to end 20 years of deflation and anaemic growth with a blend of policies named for their chief proponent, Prime Minister Shinzo Abe. ‘Abenomics’ relies on reviving domestic consumption and investment in part by weakening the yen, boosting the earnings and stock prices of giant exporters like Toyota Motors Corp and Hitachi Ltd.
A US default would likely prompt investors to buy yen.
“That would undoubtedly pose a headwind against Abenomics, which has much depended on a weak yen and higher share prices buoyed by the feel-good mood it has generated,” said Masamichi Adachi, senior economist at JPMorgan Securities in Tokyo.
A default also stands to hamper US recovery and with it a nascent rebound in global exports. A default in the first quarter of 2014 would hit just as Japan’s economy girds for an April sales tax increase and as China’s economy loses the effects of accelerated public works spending and re-stocking of inventories.