China Worried About U.S. Default

As House Republicans continue to hold the United States hostage over raising the debt limit, China is using Standard & Poor’s and Moody’s (relatively empty) threats to downgrade the United States’ credit rating as a pretext to issue stern warnings on honoring our more than $1 trillion in debt to that country.

China’s State Administration of Foreign Exchange, or SAFE, issued a statement on its website urging action to raise the debt limit this week.

“We hope the US government will earnestly adopt responsible policies to strengthen international market confidence, and to respect and protect the interests of investors,” it said on its website. Foreign Ministry Spokesman Hong Lei echoed the sentiment at a briefing earlier this month.

There’s finally a deal on the table, though, with the Senate Gang of Six unveiling a proposal to slash spending and increase government revenue, and if it passes with a debt limit increase China will presumably resume buying up our bonds without reticence. After all, we at least have begun to bend the cost curve on healthcare, something that has worried the Chinese quite a bit over the last few years:

And yet, there was budget director Peter Orszag rushing to a lunch with Chinese bureaucrats on a Monday in late July. To his surprise, when Orszag arrived at the site of the annual U.S.-China Strategic and Economic Dialogue (S&ED), the Chinese didn’t dwell on the Wall Street meltdown or the global recession. The bureaucrats at his table mostly wanted to know about health care reform, which Orszag has helped shepherd. “They were intrigued by the most recent legislative developments,” Orszag says. “It was like, ‘You’re fresh from the field, what can you tell us?'”

As it happens, health care is much on the minds of the Chinese these days. Over the last few years, as China has become the world’s largest purchaser of Treasury bonds, the government has grown increasingly sophisticated in its understanding of U.S. budget deficits. The issue has become all the more pressing in recent months, as the financial crisis and recession pushed the deficit to record levels. With nearly half of their $2 trillion in foreign currency reserves invested in U.S. bonds alone, the Chinese are understandably concerned about our creditworthiness. And this concern has brought them ineluctably to the issue of health care. “At some point, if you refuse to contain health care costs, you’ll go bankrupt,” says Andy Xie, a prominent Shanghai-based economist, formerly of Morgan Stanley. “It’s widely known among [Chinese] policymakers.” Xie himself wrote a much-read piece on the subject in 2007 for Caijing magazine–kind of the Chinese version of Fortune.

A reminder that for all the Republican calls to cut spending, the only major piece of deficit reduction legislation passed in the last decade was Obama’s healthcare law, which reduces federal deficits by nearly $150 billion by 2020.

Follow National Correspondent Matt Taylor on Twitter: @matthewt_ny

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