By Wayne Arnold and Leika Kihara
HONG KONG/TOKYO Oct 18 Deal or no deal, the
U.S. Congress' dance with default impressed policymakers and
investors in China and Japan with just how vulnerable their own
economic revival plans are to the next political tantrum on
The 11th-hour agreement on Wednesday between Congressional
Republicans and Democrats to raise the limit on U.S. government
borrowing and end a 16-day government shutdown also averted a
default on U.S. Treasury bonds that had threatened the global
economy and financial system.
But Congress gets another chance to hold U.S.
creditworthiness hostage early next year ahead of a new Feb. 7
deadline to approve a debt ceiling increase.
"We're glad a deal has been struck," said a Japanese
policymaker, who spoke on condition of anonymity. "But the
uncertainty will remain and it will be the same thing all over
again early next year."
He and other Japanese officials say they have already
developed contingency plans that include flooding Japan's
banking system with cash to keep markets functioning however
panicked investors become. And analysts say China, whose
Communist leaders are due to hold a key policy meeting next
month, may step up a push for global acceptance of its currency,
the yuan or renminbi, as an alternative to the U.S. dollar in
"They might actually consider accelerating the process,"
said Vincent Chan, head of equity research at Credit Suisse in
Hong Kong. "You strengthen the case of making the renminbi a
genuine international currency, because the Americans are
Perhaps no two economies outside the United States have more
at stake in Washington's recurring drama than Japan and China.
Not only are they the second- and third-largest economies,
but they lend Washington more money than any other single
nation. China held $1.28 trillion in U.S. Treasury securities at
the end of July and Japan owned $1.14 trillion. A default would
likely have devastated the value of their holdings.
More than that, though, both nations have adopted policies
to revitalise their own economies that to some extent rely on
the improving economic appetite, stable currency and increasing
indebtedness of the world's largest economy.
China is trying to deflate a dangerous credit bubble and
wealth imbalances with a series of reforms that include slowly
easing controls on moving money into and out of the country and
allowing its currency to gently appreciate.
Analysts predict investors faced with a U.S. default would
try to sell dollars for yuan, forcing China's central bank to
either buy up dollars at a time when the government issuing them
isn't honoring its obligations or allow a rapid increase in the
yuan's value that would hurt exports and worsen the country's
"If China allows the yuan to rise sharply, it could be very
risky given the possible asset bubbles in the country," said He
Yifeng, an economist at Hongyuan Securities in Beijing.
Japan, meanwhile, is trying to end 20 years of deflation and
anaemic growth with a blend of policies named for their chief
proponent, Prime Minister Shinzo Abe. "Abenomics" relies on
reviving domestic consumption and investment in part by
weakening the yen, boosting the earnings and stock prices of
giant exporters like Toyota Motors Corp and Hitachi Ltd
A U.S. default would likely prompt investors to buy yen.
"That would undoubtedly pose a headwind against Abenomics,
which has much depended on a weak yen and higher share prices
buoyed by the feel-good mood it has generated," said Masamichi
Adachi, senior economist at JPMorgan Securities in Tokyo.
QUID PRO QUO
A default also stands to hamper U.S. recovery and with it a
nascent rebound in global exports. A default in the first
quarter of 2014 would hit just as Japan's economy girds for an
April sales tax increase and as China's economy loses the
effects of accelerated public works spending and re-stocking of
There are no bond markets large enough to give China and
Japan an alternative to U.S. Treasuries for the dollars they
accumulate selling exports. So the prospect of another U.S.
default drama next year is likely to lend new urgency to China's
preferred solution: conducting less trade in dollars and more in
About 18 percent of China's total trade is settled in yuan
and it has registered a sharp increase this year after
stagnating for most of last year.
Much of the increase has come in China's trade with
economies outside the United States or the European Union, its
biggest demand centres, although it accelerated plans to
internationalise the currency with agreements this month with
Britain and the European Central Bank.
Achieving more trade in yuan, however, means giving China's
trading partners a place to invest their renminbi as easily as
they invest their dollars in U.S. Treasuries now.
That means opening China further to foreign investment, a
realisation that could strengthen the hand of officials
advocating faster reform.
"China can only be strong when its currency is a real
alternative," said Chan at Credit Suisse. "But to be an
alternative you have to have an open market."