All eyes are on the ongoing budget negotiations between US President Joe Biden and top congressional Republican Kevin McCarthy, a conversation that could potentially avoid an unprecedented US debt default that would rock the global financial system.
If the US Congress and the White House fail to lift the self-imposed $31.4trn legal limit on federal debt, the Treasury department could start missing payments on its obligations as soon as 1 June, according to the department’s chief, Janet Yellen.
Subsequently, Washington would be under immense pressure to keep making payments on US bonds, which underpin the global financial system. Missing a payment would trigger a Wall Street meltdown of historic proportions.
“A default would upend the global financial system and would likely be worse than the 2008 crash,” said Nigel Green, the CEO and founder of deVere Group, one of the world’s largest independent financial advisory organisations. “It would cause upheaval on an unprecedented level. However, there would be a major beneficiary of the economic and financial fallout: China.
“The US failing to raise the debt ceiling and defaulting on its financial obligations would be the ultimate gift for China as it seeks global economic and financial dominance.”
A default would lead to a decline in the value of the US dollar and a loss of confidence in the US financial system. As such, investors would seek alternative destinations for their capital.
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“China would move to position itself as a more stable and attractive investment option, attracting more international investment and capital inflows. In turn, this would boost the Chinese economy and financial markets,” said Green.
If Congress is unable to agree and raise the debt ceiling there will be a depreciation of US asset prices including real estate, companies and infrastructure.
“China, with its significant foreign exchange reserves, would likely take advantage of the situation by purchasing these assets at discounted prices,” said Green. “Beijing would, we expect, acquire strategic assets in sectors such as technology, energy or manufacturing, which could enhance its economic and technological capabilities.”
The strengthening of the yuan’s position would also be a major advantage for China. “The US dollar’s status as the world’s primary reserve currency could be undermined in the event of a default. This would be an opportunity for China to promote the internationalisation of its own currency,” explained Green.
Beijing has been pushing for the use of the yuan in global trade, investment and as a reserve currency, aiming to reduce reliance on the US dollar and enhance the influence of its currency – and a default would be a huge help for China in this regard.
Even if there is a last-minute agreement and a default is diverted, the drama will have eroded some of the current global reserve currency’s credibility and reputation as a ‘safety asset’.
“In addition, we expect that China would seize the opportunity to strengthen its trade partnerships with other countries, offering more attractive trade terms and position itself as a reliable trading partner,” said Green. “This could lead to increased market access and trade opportunities for Chinese firms.”
Whatever happens in debt ceiling talks between Democrats and Republicans, China’s massive PR machine is already spinning the narrative that the US is a declining power.