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Us To China Debt

Risks To Economic Growth

Gravitas: U.S-China clash over Pak’s debt crisis

Debt levels may affect economic growth rates. In 2010, economists Kenneth Rogoff and Carmen Reinhart reported that among the 20 developed countries studied, average annual GDP growth was 34% when debt was relatively moderate or low , but it dips to just 1.6% when debt was high . In April 2013, the conclusions of Rogoff and Reinhart’s study came into question when a coding error in their original paper was discovered by Herndon, Ash and Pollin of the University of Massachusetts Amherst. Herndon, Ash and Pollin found that after correcting for errors and unorthodox methods used, there was no evidence that debt above a specific threshold reduces growth. Reinhart and Rogoff maintain that after correcting for errors, a negative relationship between high debt and growth remains. However, other economists, including Paul Krugman, have argued that it is low growth which causes national debt to increase, rather than the other way around.

Commenting on fiscal sustainability, former Federal Reserve Chairman Ben Bernanke stated in April 2010 that “Neither experience nor economic theory clearly indicates the threshold at which government debt begins to endanger prosperity and economic stability. But given the significant costs and risks associated with a rapidly rising federal debt, our nation should soon put in place a credible plan for reducing deficits to sustainable levels over time.”

It May Have No Choice

Few moments better encapsulate the hope and hubris of Chinas Belt and Road Initiative, a global infrastructure binge, than the inauguration of Sri Lankas Colombo Port City in 2014. Xi Jinping, Chinas president, attended in person, nodding approvingly as a project manager introduced the $15bn plan to build a high-tech offshore financial centre with a marina, hotels and luxury homes on 665 acres of land reclaimed from the sea off Sri Lankas capital. Local officials likened the project to Dubai and Singapore. Mr Xi called it a major hub of the 21st Century Maritime Silk Roadthe part of Belt and Road that aimed to reshape ocean trade by financing ports and related infrastructure without the pesky conditions that Western and multilateral lenders demand.

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Central to the issue is Chinas relationship with the Paris Club of 22 mostly Western creditor countries. It is an ad hoc participant in the group but has refused invitations to join. One reason is the clubs close connection to the imf and World Bank, which America dominates. Another is its commitment to consensus, information-sharing and comparable treatment for all creditors. China wants to be prioritised and favours negotiating debt relief bilaterally: many of its loan contracts include clauses to that effect. Besides, adopting the groups standards would undermine Mr Xis talk of a superior alternative to Western development finance.

Raising Reserve Requirements And Full Reserve Banking

Two economists, Jaromir Benes and Michael Kumhof, working for the International Monetary Fund, published a working paper called The Chicago Plan Revisited suggesting that the debt could be eliminated by raising bank reserve requirements and converting from fractional-reserve banking to full-reserve banking. Economists at the Paris School of Economics have commented on the plan, stating that it is already the status quo for coinage currency, and a Norges Bank economist has examined the proposal in the context of considering the finance industry as part of the real economy. A Centre for Economic Policy Research paper agrees with the conclusion that “no real liability is created by new fiat money creation and therefore public debt does not rise as a result.”

The debt ceiling is a legislative mechanism to limit the amount of national debt that can be issued by the Treasury. In effect, it restrains the Treasury from paying for expenditures after the limit has been reached, even if the expenditures have already been approved and have been appropriated. If this situation were to occur, it is unclear whether Treasury would be able to prioritize payments on debt to avoid a default on its debt obligations, but it would have to default on some of its non-debt obligations.

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Fannie Mae And Freddie Mac Obligations Excluded

Under normal accounting rules, fully owned companies would be consolidated into the books of their owners, but the large size of Fannie Mae and Freddie Mac has made the U.S. government reluctant to incorporate them into its own books. When the two mortgage companies required bail-outs, White House Budget Director Jim Nussle, on September 12, 2008, initially indicated their budget plans would not incorporate the government-sponsored enterprise debt into the budget because of the temporary nature of the conservator intervention. As the intervention has dragged out, pundits began to question this accounting treatment, noting that changes in August 2012 makes them even more permanent wards of the state and turns the governments preferred stock into a permanent, perpetual kind of security.

China Hits Back At Debt Criticism

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China rejected this weeks criticism by Brent Neiman, a top advisor to U.S. Treasury Secretary Janet Yellen, about its unconventional approach to debt restructuring.

Foreign Ministry Spokesperson Wang Wenbin cited the relative size of Chinese debt and its participation in G20 debt relief programs. He also called out the Western private sector for their share of Global South debt distress:

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How Are Policies Implemented

The Ministry of Finance implements policy with respect to local government debt through a series of warnings and encouragements.

The central government also controls the financial activities of local governments by issuing guidance to state-owned banks on the loan policy they should undertake with respect to local government.

National Debt Of The United States

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The national debt of the United States is the total national debt owed by the federal government of the United States to Treasury security holders. The national debt at any point in time is the face value of the then-outstanding Treasury securities that have been issued by the Treasury and other federal agencies. The terms national deficit and national surplus usually refer to the federal government budget balance from year to year, not the cumulative amount of debt. In a deficit year the national debt increases as the government needs to borrow funds to finance the deficit, while in a surplus year the debt decreases as more money is received than spent, enabling the government to reduce the debt by buying back some Treasury securities. In general, government debt increases as a result of government spending and decreases from tax or other receipts, both of which fluctuate during the course of a fiscal year. There are two components of gross national debt:

During the COVID-19 pandemic, the federal government spent trillions in virus aid and economic relief. The CBO estimated that the budget deficit for fiscal year 2020 would increase to $3.3 trillion or 16% GDP, more than triple that of 2019 and the largest as % GDP since 1945.

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Other Sources Of Public

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This identified 30 trillion Yuan of debts raised through the derivative markets and other shadow banking methods.

The Institute also noted a further total of 10 trillion Yuan in obligations that were obscured by lease agreements and other public-private partnership techniques.

This amounts to an extra 40 trillion Yuan of public debt that is not reported in the countrys national debt figure.

That is another 41.6% of GDP, bringing the true debt to GDP ratio for Chinas national debt up to 92.8%.

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Chinas Us Debt Holdings Drop To 12

Chinas holdings of U.S. debt dropped to the lowest since 2010 after falling below the $1 trillion mark in May, according to data released by the U.S. Treasury on Aug. 15.

After seven months of continuous decreases, Chinas U.S. Treasury holdings dropped to $967.8 billion in June, $113 billion less than last November, according to international capital flows.

China decreased its debt holdings while the U.S. Federal Reserve has been raising rates aggressively to bring down high inflation, which means the sale of bonds ahead of maturity will lead to a capital loss.

Bond prices have an inverse relationship with the prevailing interest rates. Driven by the market forces to pursue higher interest payments, older bonds become less valuable when interest rates rise as interest payments are now lower than new bonds available in the market.

However, according to Chinese state-owned business media Yicai, Chinas holdings of U.S. Treasuries declined as China stabilized its foreign currency reserves diversify overseas investment risks.

In addition, Chinese state-owned media Shanghai Observer said on Aug. 16 that the risk of holding U.S. debt has increased due to the Feds interest rate hikes.

In response to the comments made by the Chinese state-owned media, Li Songyun, a doctorate in economics and expert on the Chinese economy, told The Epoch Times that the claim of increased risk of holding U.S. debt is nonsense.

Is China Economy Bigger Than Us

As per projections by IMF for 2021, United States is leading by $6,033 bn or 1.36 times on an exchange rate basis. The economy of China is Int. $3,982 billion or 1.18x of the US on purchasing power parity basis. According to estimates by World Bank, Chinas gdp was approx 11% of the US in 1960, but in 2019 it is 67%.

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How Bad Is It

Chinaâs debt is more than 250 percent of GDP, higher than the United States. It remains lower than Japan, the worldâs most indebted leading economy, but some experts say the concern is that Chinaâs debt has surged at the sort of pace that usually leads to a financial bust and economic slump.

Total debt to GDP

Is There Hidden Public Debt In China

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The central government is aware that it is subject to international scrutiny.

However, the opportunities for creative debt management seem to be greater in local government.

As evidenced by the national governments bank bailout strategy in 2015 shows, Chinas officials seem to like to use a combination of local government financing and the lending policies of state-owned banks to channel a lot of central government actions through the accounts of local government.

An estimate by Chinas National Institute of Finance and Development, reported by the South China Morning News in April 2018, revealed hidden debts owed by the countrys local governments.

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Risk Perspective For Us

Although this ongoing activity has led to China becoming a creditor to the U.S., the situation for the U.S. may not be that bad. Considering the consequences that China would suffer from selling off its U.S. reserves, China will likely refrain from such actions.

Even if China were to proceed with the selling of these reserves, the U.S., being a free economy, can print any amount of dollars as needed. It can also take other measures like quantitative easing . Although printing dollars would reduce the value of its currency, thereby increasing inflation, it would actually work in favor of U.S. debt. Real repayment value will fall proportionately to the inflationsomething good for the debtor , but bad for the creditor .

Although the U.S. budget deficit has been rising, the risk of the U.S. defaulting on its debt practically remains nil . Effectively, the U.S. may not need China to continuously purchase its debt rather China needs the U.S. more, to ensure its continued economic prosperity.

The National Debt Of China

Obligations that are not represented by bonds or bills, such as pension obligations or guarantees to the banking sector or private companies are not included in the national debt figure.

China does not include the debts of state-owned enterprises into its accounts.

These businesses, which are controlled either by the central government or by the local government represent a very large sector of the economy and banks lend to them in preference to private sector businesses.

This credit availability makes state-owned enterprises potential cash cows for unscrupulous managers.

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China Should Do More To Help Avoid Debt Crisis: Us Official

The “enormous scale” of Chinese lending to developing nations makes it critical Beijing do more to participate in restructurings to avoid a new international debt crisis, a senior US Treasury official said Tuesday.

In the wake of the pandemic, many countries are facing debt distress, and China has delayed or failed to participate in multinational efforts to try to work out those borrowing loads, said Brent Neiman, counselor to the Treasury Secretary.

“China’s enormous scale as a lender means its participation is essential,” Neiman said in a speech to the Peterson Institute for International Economics.

He noted that estimates of the total of outstanding Chinese official loans, while uncertain due to a lack of transparency, range widely to as much as $1 trillion.

“China became the world’s largest official creditor in 2017, surpassing the claims of the World Bank, IMF, and all Paris Club official creditors combined,” he said.

The high borrowing, outflow of funds from developing nations and strong US dollar amid rising interest rates have increased the pain for debtor countries, and “these ingredients all but assure debt distress in a number of countries,” he said.

“Failure to act on these debts could imply years of ongoing difficulties with the servicing of debts and with underinvestment and lower growth in low and middle income countries.”

Public And Government Accounts

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As of July 20, 2020, debt held by the public was $20.57 trillion, and intragovernmental holdings were $5.94 trillion, for a total of $26.51 trillion. Debt held by the public was approximately 77% of GDP in 2017, ranked 43rd highest out of 207 countries. The CBO forecast in April 2018 that the ratio will rise to nearly 100% by 2028, perhaps higher if current policies are extended beyond their scheduled expiration date.

The national debt can also be classified into marketable or non-marketable securities. Most of the marketable securities are Treasury notes, bills, and bonds held by investors and governments globally. The non-marketable securities are mainly the “government account series” owed to certain government trust funds such as the Social Security Trust Fund, which represented $2.82 trillion in 2017.

The non-marketable securities represent amounts owed to program beneficiaries. For example, in the cash upon receipt but spent for other purposes. If the government continues to run deficits in other parts of the budget, the government will have to issue debt held by the public to fund the Social Security Trust Fund, in effect exchanging one type of debt for the other. Other large intragovernmental holders include the Federal Housing Administration, the Federal Savings and Loan Corporation’s Resolution Fund and the Federal Hospital Insurance Trust Fund .

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China Lowers Us Debt Holdings

China is reducing its holdings of US government debt, with the balance declining 9% through July from the end of last year as sanctions against Russia drive home the risks of relying on the dollar, reports Nikkei Asia.

Chinas Treasury bond holdings came to $970 billion at the end of July, US Treasury Department data showsa small increase from June, preceded by seven straight months of declines. While the total has been trending lower since 2018 amid the trade disputes between Washington and Beijing, it sank by $100 billion, or nearly 10%, in the first half of 2022 alone.

That declinethe steepest on a half-year basis since 2016coincided with a $38.5 billion rise in Treasury holdings in the Cayman Islands and a $7 billion increase in Bermuda, both well-known tax havens.

Why Does China Buy Us Debt

China buys U.S. debt for the same reasons other countries buy U.S. debt, with two caveats. The crippling 1997 Asian Financial Crisis prompted Asian economies, including China, to build up foreign exchange reserves as a safety net. More specifically, China holds large exchange reserves, which were built up over time due in part to persistent surpluses in the current account, to inhibit cash inflows from trade and investment from destabilizing the domestic economy.

Chinas large U.S. Treasury holdings say as much about U.S. power in the global economy as any particularity of the Chinese economy. Broadly speaking, U.S. debt is an in-demand asset. It is safe and convenient. As the worlds reserve currency, the U.S. dollar is extensively used in international transactions. Trade goods are priced in dollars and due to its high demand, the dollar can easily be cashed in. Furthermore, the U.S. government has never defaulted on its debt.

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