BEIJING (Reuters) - The United States is “playing with fire” if it defaults on its debt and China is ready to promise to stand by its massive investment in U.S. Treasuries to avert such a disaster, an adviser to China’s central bank said.
Speaking at the sidelines of a forum in Beijing, Li Daokui urged U.S. politicians to assure China, the largest foreign creditor of the United States, that its billions of dollars of investment in U.S. Treasuries are in safe hands.
The remarks from Li are the sharpest yet from China and make plain China’s displeasure with a growing view among some U.S. politicians that a brief U.S. debt default may be an acceptable price to pay to force a cut in state spending.
China is estimated to have invested as much as 70 percent of its $3 trillion foreign exchange reserves in Treasuries.
“There is a risk that a U.S. debt default may happen. The result will be very serious and I really hope they would stop playing with fire,” Li said.
Li’s comments also underscored that China is constrained by its vast holdings of Treasuries, and that it is best protected against a U.S. debt default if it stands by the United States.
This is because a sell-off by Beijing may stir even more panic and further pummel the dollar.
“The Chinese government sincerely hopes that the U.S. government would look at the big picture,” Li said. “If a default happens, the Chinese government should have a consultation with the U.S. government.”
“China can promise that we will not sell our holdings of U.S. debt, but the United States must also promise that you will not hurt our interests by guaranteeing the safety of our investment,” he said.
“I really worry about the risks of a U.S. debt default, which I think may lead to a decline in the dollar’s value,” Li said.
U.S. politicians who are broaching the idea of a U.S. debt default believe the White House can pull off such an event without plunging global markets into chaos.
So far, the U.S. dollar has not suffered greatly from the talk of a debt default, with a tepid outlook for the U.S. economy proving to be a bigger drag on the currency.
Indeed, other Asian nations have also conceded that they have little choice but to hang on to U.S. government debt since it is by far the world’s biggest, most liquid, and therefore safest, asset class.
Oman, which pegs its currency to the U.S. dollar along with most Gulf Arab states, said on Wednesday a U.S. debt default would destabilize Gulf Arab reserves.
Reporting by Aileen Wang and Kevin Yao; Editing by Koh Gui Qing/Ruth Pitchford