China and Japan ratcheted up pressure on the US to avoid an unprecedented US default on its debt as Democrats and Republicans continued their stand-off over the budget in the second week of a US government shutdown.
Two senior White House economic officials said on Monday that President Barack Obama would not back down from his refusal to negotiate with Republicans in Congress, increasing worries that the debt ceiling limit would be reached on October 17 without an agreement, raising the threat of a default.
Global markets were jittery over the latest signs of a stalemate, with the S&P 500 dropping more than 9 points, the FTSE All-World equity index down around 0.5 per cent and the Dow falling by more than 0.6 per cent.
In its first official reaction to the US political stalemate over the budget and looming debt ceiling deadline later this month, Beijing said “the clock is ticking” and urged politicians in Washington to “ensure the safety of the Chinese investments”.
Zhu Guangyao, vice-finance minister, told a media briefing that China has made clear its unease over the political impasse in Washington. In Japan, the Ministry of Finance is very worried about the potential impact on currency markets, according to a senior official. A US default could cause investors to dump the US dollar, which would sharply push up the value of the yen.
While the official said he was “very confident” such an outcome would be averted, he recalled the “chaos” in September 2008 when the US House of Representatives initially rejected a $700bn bailout of the stricken financial services industry.
House Republican leaders have maintained a hardline in the current budget battle. John Boehner, the Republican speaker of the House of Representatives, declared on Sunday it was “time for us to stand and fight” over the US budget.
Mr Boehner said the Republican majority in the House would not pass bills to fund the government or increase the debt ceiling unless the Obama administration was willing to make concessions on healthcare and other issues.
Gene Sperling, the chairman of the White House’s National Economic Council, indicated the administration might consider a short-term lift of the debt ceiling, adding that it was up to Congress to decide the duration of any increase.
The rhetoric from US politicians rattled China, with Mr Zhu noting that “the US has a large amount of direct investment in China, and China has a vast number of US Treasury bonds . . . The US is clearly aware of China’s concerns about the financial stalemate [in Washington] and China’s request for the US to ensure the safety of Chinese investments.”
China held $1.28tn in US Treasuries in July 2013, according to US Treasury data, although the true figure could well be higher than this as China also invests through intermediaries. Advisers to the People’s Bank of China, the central bank, have been urging the authorities to diversify the holdings.
Later this week, Li Keqiang, the Chinese premier, will embark on a three-nation tour of southeast Asia. Coming just after President Xi Jinping’s high-profile visit to Indonesia and Mr Obama’s decision to pull out of the Apec summit in Bali, Mr Li’s tour of Brunei, Thailand and Vietnam will reinforce China’s growing engagement with the region.
Mr Zhu said Mr Obama’s absence from this week’s summit was “something that all other parties didn’t want to see [happen]”.
“We hope that the US can draw lessons from history,” Mr Zhu added, noting that a last-minute agreement over the debt ceiling in August 2011 still triggered a downgrade of America’s triple A rating by Standard & Poor’s.
“As the world’s largest economy and an issuer of the world’s major reserve currency, it is important that the US take credible steps to address its dispute over the debt ceiling in a timely fashion and avoid a default.”
Other bankers and traders in Asia were sanguine about the threat of a US default with several people saying the drama playing out on Capitol Hill was “just political theatre”, or in the words of another, a US default “just ain’t gonna happen”.
“The prevailing view in the market is that someone in Washington will blink and this will all blow over,” said a third banker.