Shutdown Specter US Fumbling Puts China at Risk

The whole world looked on as the United States embarrassed itself for three weeks with its government shutdown. China, the only other superpower, profited from the domestic dispute -- but as Washington's largest creditor, it also has cause for concern.

By Marc Hujer and

AFP

A little before 11 a.m. last Wednesday, a newly crowned Miss America announced her presence at the White House via Twitter. At the time, most US politicians had nothing on their minds except their country's budget conflict, with Democrats and Republicans in Congress unable to agree on a new national debt limit for nearly three weeks.

Then, on Wednesday, Congress was set to begin a decisive round of voting to save the country and the global economy. Even as television commentators feverishly awaited the results of the Congressional vote, this year's Miss America, 24-year-old Nina Davuluri, tweeted: "Had the pleasure of having a conversation with President @BarackObama in the Oval Office today!"

"President Barack Obama appears to be multitasking," news channel CNN scoffed about the president simultaneously steering the nation through a budget crisis and finding time to talk to the beautiful Indian-American Davuluri.

In the preceding weeks, however, Obama seemed to find it difficult to multitask, cancelling meetings with a number of important, influential allies and investors and even calling off a trip to Asia during which he had planned to meet with Chinese President Xi Jinping.

Global Embarrassment

The United States had embarrassed itself on the global stage when Republican members of Congress blocked President Obama's healthcare reform, also known as "Obamacare," by refusing to approve an increase to the country's debt limit necessary to fund the reform. This forced the government to shut down its administration, making 800,000 government employees take unpaid mandatory leave, and amounted to the US voluntarily inflicting damage on itself. The political opponents didn't manage to reach an agreement -- and even then, only a temporary one -- until last Wednesday, under enormous pressure and at the last minute. Is this how a superpower behaves?

Those weeks during which the US feared for its financial solvency showed just how vulnerable the country is. Yet at the same time, the episode showed America's strength. No other country could afford to engage in such drama without being punished by financial markets, creditors and trade partners.

But can even the US really afford it? Credit rating agency Standard & Poor's calculates the shutdown inflicted $24 billion (€18 billion) in economic damage. But the true damage here is of a political nature, with China, the world's other superpower, now openly expressing its doubts about the US.

'Building a De-Americanized World'

In a commentary published last week by Xinhua, Beijing's state-owned news agency, commentator Liu Chang wrote: "As US politicians of both political parties are still shuffling back and forth between the White House and the Capitol Hill without striking a viable deal to bring normality to the body politic they brag about, it is perhaps a good time for the befuddled world to start considering building a de-Americanized world."

Creating such a world calls for "several corner stones," the commentary continued, among them all countries adhering to "the basic principles of international law" and recognizing the international authority of the United Nations. "That means no one has the right to wage any form of military action against others without a UN mandate," Xinhua wrote.

The global financial system would also require "some substantial reforms," the news agency said. "The developing and emerging market economies need to have more say in major international financial institutions including the World Bank and the International Monetary Fund." Xinhua also suggested "the introduction of a new international reserve currency that is to be created to replace the dominant US dollar, so that the international community could permanently stay away from the spill-over of the intensifying domestic political turmoil in the United States."

There are many reasons for China's current self-assuredness, and one of them is embodied by a grand, granite-colored building at 32 Chengfang Street in Beijing. This is the headquarters of China's central bank, and every month its accounts receive around $3 billion from Washington, in interest on American treasury securities -- debt of the world's largest economy held by its second largest.

The Chinese government is sitting atop a mountain of cash unlike anything seen before. Its foreign currency reserves totalled $3.66 trillion at the end of September, $163 billion more than in June. Two more quarters of such inexorable growth would see that figure nearly reaching the $4 trillion mark.

China Attracting Money Faster Than Ever

And while Washington was arduously averting national bankruptcy last week, Beijing broke another financial record when China's currency, the yuan, reached its highest value against the dollar since 1993. Although investors are pulling back from most emerging markets, money is flowing into China faster than ever.

Around one third of China's foreign currency reserves -- even the People's Bank of China doesn't cite an exact figure -- are invested in US bonds. That makes China the US's largest foreign creditor, and that fact poses a problem for Beijing as well.

China has been issuing warnings to the US since the start of the recent shutdown crisis. Beijing is keeping "a close eye" on the conflict in Washington, said Premier Li Keqiang, who is also his country's top economic policy specialist. Deputy Finance Minister Zhu Guangyao added: "In the long term, America needs to solve its debt problem, to prevent the global economy from slumping."

Even so, China has been only too glad to make use of the vacuum the US budget crisis has created on its own doorstep. President Xi attended one of the two summits in Asia that his counterpart Obama skipped. Xi also traveled to Jakarta, where Obama spent part of his childhood, and to Malaysia. During this time, Xi signed trade agreements worth $30 billion. Premier Li, meanwhile, traveled to a summit of the Association of Southeast Asian Nations (ASEAN) in Brunei, then continued on to Thailand and Vietnam.

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kukaramanga 10/22/2013
1. It is ironic
To see others profiting from US misery in the same way that the US has capitalized and profited from the misery of others for so long. The tides are turning indeed. One more sign that the empire is collapsing...at last!
Jim in MD 10/22/2013
2. Super Powers
Since when are the super powers of the world dependent on the health of the US? Nations that aspire to become super powers probably should worry about their own long-term viability first. Much of Europe currently is nearly in as much debt to GDP or more at the moment. Japan has twice the burden. Korea's is rising too, and no one can even track real Chinese debt or GDP.
Ed Marek 10/22/2013
3. China not a superpower
China is not a superpower. Militarily, it lacks global reach. Economically, it is growing rapidly but it was so far behind its growth is exaggerated. Politically, the media ascribe more influence to China than it has.
ajvollmer 10/23/2013
4. How about some simple facts?
We would hope that as reputable journalists, Der Spiegel would give some balanced basic info on the US debt. Instead this article looks like it was written by the Tea Party. Despite your scare graphic about the amount the Chinese hold of the US debt, they hold less than 8 percent of the debt. About 70% of the debt is owned by American citizens and our government. For a realistic view of the debt, please see http://www.nytimes.com/2012/01/02/opinion/krugman-nobody-understands-debt.html
wondering14 10/23/2013
5. strange words:
According to Germans, Europeans, non-Americans, how did America embarrass itself? As an American, why should a shutdown be embarrassing?
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