Mendoza School of Business

How China Could Break the Debt-Ceiling Impasse, And Why It Won’t.

Published: July 25, 2011 / Author: Anjali Cordeiro

As the largest foreign holder of US Treasurys, China has a heft in
bond markets that no other creditor can claim. The Asian giant is so
powerful, in fact, that it could — if it chose — help the White House end the
debt-ceiling impasse.

Any threats from Chinese officials that the country plans to slash
its Treasury holdings in response to a US downgrade would likely prompt a
market selloff. And yet that could have a desirable, longer-term impact if the
plunge was sharp enough to help the White House make its case to holdouts in
Congress who are blocking a deal.

So far, Treasury prices have been barely dented by the political
vacillation in Washington. But a bigger drop in prices might change lawmakers’
minds and hasten an agreement, as it would expose the costs of dithering. In
turn this would likely boost Treasurys again and China’s holdings would return
to square one. All would be well in the world again.

But would China ever play such Machiavellian game? Not likely, say
China experts.

“They would be very reluctant because of their own posture about
keeping their own policies domestic,” says Jeffrey Bergstrand, a University of
Notre Dame finance professor.

To read the entire article visit: How China Could Break the Debt-Ceiling Impasse, And Why It Won’t.



Topics: Mendoza