China Presses U.S. to Lift Debt Limit as Tea Party Says Butt Out

By Ian Katz & Michael C. Bender - Oct 15, 2013 6:07 PM GMT-0430

China, the U.S.’s largest creditor abroad, urged American lawmakers opposed to raising the debt limit by tomorrow to get out of the way. Tea Party Republicans’ response: mind your own business.
The U.S. must “shoulder its responsibility” as the world’s biggest economy and holder of the main reserve currency and “take concrete measures before Oct. 17 to avoid a default,” Deputy Finance Minister Zhu Guangyao said at a briefing with reporters yesterday in Beijing in which he referred to “the attitude of the Tea Party.”

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Zhu Guangyao, Vice Minister of Finance of China, at the G20 summit on September 5, 2013. Photographer: Yuri Kadobnov/AFP via Getty Images

Lawmakers tied to the Tea Party didn’t appreciate the advice, even from a nation that holds almost a quarter of foreign-owned Treasuries -- $1.28 trillion as of July.
“They need to stay out of our politics,” Representative Blake Farenthold, a Tea Party-backed Texas Republican, said in an interview. China’s criticism “almost sounds like a threat,” said Representative Ted Yoho, a Florida Republican. “For them to say something derogatory about the Tea Party, I take offense to that.”
The appeal from China, the world’s second-largest economy, underscores the importance of U.S. Treasuries to global financial markets. Treasuries are viewed as a safe haven for countries trying to reduce risk, and any doubt about U.S. ability to pay its debt could rattle investors.
The yield on the benchmark 10-year Treasury note rose to a three-week high of 2.73 percent yesterday and the Standard & Poor’s 500 Index fell 0.7 percent as efforts to reach a compromise on the debt limit faltered. After markets closed in the U.S., the U.S.’s AAA credit grade was placed on ratings watch negative by Fitch Ratings.

Japan, Chile

During International Monetary Fund meetings in Washington last weekend, officials from Japan to Chile emphasized the need to raise the debt ceiling.
It’s unusual for Chinese officials to become embroiled in U.S. political debates and mention “particular parties or factions,” said David Dollar, who was the U.S. Treasury Department’s economic and financial emissary based in Beijing from 2009 until this year.
He said such remarks probably are aimed at Chinese citizens because officials “want their own population to know that they’re paying attention, that they care about these things, that they’re advocating for the United States to manage this well.”
Li Jie, head of the foreign-exchange reserve research office at the Central University of Finance and Economics in Beijing, said if he were talking with a U.S. lawmaker, he would ask: “Why would the United States be so stupid as to cut its own financing channel or to make its financing more expensive?”

‘Free Enterprise’

The Chinese are “attacking the wrong thing in this country,” Yoho said in an interview yesterday. The Tea Party is “standing up for fiscal responsibility, free enterprise, the Constitution and limited government.”
Lawmakers who identify with the Tea Party support decentralized government and less spending and debt. They pushed Republican House Speaker John Boehner last month to fight for major changes to the health-care law known as Obamacare as part of the budget debate.
That stalemate led to the first government shutdown since 1996 and has merged into a debate over the nation’s $16.7 trillion debt limit. Treasury Secretary Jacob J. Lew has said that if Congress doesn’t raise the debt cap, the U.S. will exhaust its borrowing authority by tomorrow, leaving the government with about $30 billion cash.
Lew has cautioned lawmakers that the deadlock may erode the U.S.’s international stature.

Currency Basket

“It’s no secret: There are discussions around the world where others would like there to be a basket of currencies that might be used as an alternative to the dollar,” Lew told the Senate Finance Committee last week. “The world actually counts on us being responsible.”
Tea Party members have accused the Obama administration of exaggerating the importance of the debt ceiling and say the Treasury could avoid a default by paying interest on debt before other bills.
“If the president wants to pay our creditors, he will,” Representative Mo Brooks, an Alabama Republican affiliated with the Tea Party, said in an interview yesterday. “There’s plenty of money to pay all of our creditors in a timely fashion.”
Lew rejects suggestions that setting priorities in payments is a substitute for raising the debt limit, calling it “default by another name.”
China has been studying reducing its reliance on U.S. bonds in reserve management for years but has found few solutions, Li said in a phone interview.

Holdings Grow

China’s holdings of U.S. government debt totaled 22.8 percent of all Treasuries held abroad, and have risen from $550 billion, or 21 percent, five years ago, according to Treasury Department data.
“Euro bonds may have the potential, but not for now,” Li said. “Diversifying into commodities can work in theory, but isn’t possible in reality because these markets are too small for China’s foreign-exchange reserves.”
China has $3.66 trillion in reserves, up from $3.2 trillion two years ago.
“China has no alternative to replace U.S. Treasuries in its foreign-exchange reserve management,” Yuan Gangming, a researcher with the government’s Chinese Academy of Social Sciences in Beijing, said in a telephone interview.
Dollar, who is now a senior fellow with the Brookings Institution in Washington, said China’s concerns are genuine and officials there “would like to see the U.S. resolve this as quickly and as smoothly as possible so that the world economy can continue to develop, and the dollar can continue to play its role.”
To contact the reporters on this story: Ian Katz in Washington at ikatz2@bloomberg.net; Michael C. Bender in New York at bender@bloomberg.net
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net