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You call Greece a crisis? Try the U.S., says China

A day after the Greek parliament passed another round of austerity cuts to stave off the country’s financial ruin, the third quarter economic outlook report released yesterday by the Bank of China is more worried about the situation in the U.S.: The U.S. sovereign debt problem is more hazardous than the European debt crisis, economists ...

MANDEL NGAN/AFP/Getty Images
MANDEL NGAN/AFP/Getty Images

A day after the Greek parliament passed another round of austerity cuts to stave off the country’s financial ruin, the third quarter economic outlook report released yesterday by the Bank of China is more worried about the situation in the U.S.:

The U.S. sovereign debt problem is more hazardous than the European debt crisis, economists from Bank of China Ltd. said Thursday in the bank’s third quarter economic outlook, predicting that the U.S. sovereign debt risk will continue to intensify in the next few years.

U.S. public debt stood at around 65% of the country’s nominal gross domestic product in the first quarter, exceeding the "safety line" of 60%, according to the report by one of China’s big four banks. The U.S. still hasn’t come up with any effective solutions, and the possibility that it will face a sovereign debt crisis is increasing, it added.

The op-ed page of state-owned outlet China Daily contains a similar message:

… The debt crisis in Europe and uncertainty in Japan could mean that there will be no strong alternatives to dollar assets, so it has a great chance that the US might walk away from its debts and, at the same time, borrow more money from other countries.

Chinese officials have expressed concerns about the possibility of a U.S. default before. Earlier this month, an adviser to the People’s Bank of China (China’s central bank; the Bank of China is one of China’s four major state-owned commercial banks) said that Congressional Republicans floating the idea of a default were "playing with fire." Of course, it’s no secret that China is the largest single holder of U.S. debt, with $1.15 trillion’s worth of Treasury bonds in their coffers. But statistics from London-based bank Standard Chartered suggest that the Treasury buying binge may be over.

Meanwhile, other revelations from today about China’s role in the U.S.’s looming budget fiasco cast China’s recent worries in an amusing light. A Reuters article  suggests that, up to 2009, China was buying up more U.S. debt than previously disclosed by circumventing Treasury debt auction rules. Essentially, China would run its deals through third-party brokers to disguise that its purchases were exceeding the cap set on purchases by single parties at individual auctions. A change in the debt auction rules in 2009 closed the loophole, and Treasury appears to have made disguise the change as a "modernization of auction rules," so as not to trouble relations with China.

Those were the days, eh?

Edmund Downie is a Yale University Gordon Grand Fellow currently interning at the Centre for Policy Research in New Delhi. He works on the regional political economy of Asia. Follow him at @ned_downie.

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