SHANGHAI — As the largest foreign holder of U.S. dollar debt, China has much to lose in the event of an American default. But with the default deadline just over a week away and negotiations in Washington seemingly at an impasse, the Beijing government and the state-run media — which normally do not pass up a chance to criticize U.S. policy — have been largely silent.
One likely reason, analysts said, is the extreme sensitivity among Chinese officials to the accusation that the government has too many dollar holdings, putting China in what critics call “a dollar trap.”
They also cited the risk that any statements from Beijing at this point could backfire, given the uncertain course of the debt talks in Washington and the extreme suspicion among many members of Congress about Chinese intentions and motives.
“There’s no question that they’re very concerned about how this is handled and about the implications for the U.S. economy and the value of the U.S. dollar,” said Kenneth Lieberthal, a China expert with the Brookings Institution in Washington, referring to Chinese officials. But, he said, “they’re sensitive to criticism that they’re over-invested in the U.S. dollar. Highlighting that is not in the interests of the top leadership.”
He added, “I don’t think they want to risk complicating the situation with voluble statements.”
Foreign Ministry spokesman Hong Lei made a brief statement at a July 14 news conference after a reporter asked for a comment on a warning by Moody’s Investors Service about a possible downgrade of the U.S. credit rating.
“We hope the U.S. government adopts responsible policies and measures to guarantee the interests of investors,” Hong said, without elaborating. He did not immediately respond to an e-mail asking for further comment about the latest impasse in Washington.
On Wednesday, China’s State Administration of Foreign Exchange echoed that appeal, saying in a statement,“We hope the U.S. government concretely takes responsible policy measures to increase the confidence of international financial markets and respects and safeguards investors’ interests.”
“They are playing it very low-key,” said Nicholas Lardy of the Peterson Institute for International Economics, who was in China two weeks ago and said he noticed the reticence during meetings with economists and Central Bank officials. “They don’t want to acknowledge publicly their vulnerability. . . . I think word has gone down not to make this a big deal.”
The often anti-American media here have also been oddly silent, with most papers, and Xinhua, the official news agency, running brief stories about the ongoing negotiations in Washington — without commentary and mostly putting as positive a spin as possible on the talks.
“U.S. not to default on debt: House speaker,” was the headline on Xinhua’s five-paragraph news story all day Saturday.
News editors in China have described receiving regular directives from the State Council Information Office and the Communist Party’s Central Propaganda Department — the country’s censors — giving “guidance” as to how stories should be played, what should be emphasized and what stories to play down.
“There’s obviously a directive that’s gone down — no reporting, no speculation, no word on how they want this to turn out,” said Dean Cheng, a China scholar with the Heritage Foundation in Washington. “They don’t want to spook anybody.”
Another reason for the official reticence may be that Chinese leaders think the situation will be resolved, so there is no point in starting a public panic.
One scenario, in the event of a default, is that the Obama administration could choose to pay the United States’ foreign bondholders first, meaning Beijing would not have to worry.
Despite China’s vast holdings of U.S. Treasury securities, it is unclear precisely how Beijing’s leaders want the situation to unfold. Cheng said there may be nationalist elements in China — “a tiny, tiny minority” — who might not mind seeing the U.S. economy take the hit from a default, because that would feed into the popular narrative among some here that the United States’ days as a global superpower are numbered.
“You have to wonder if there aren’t a few people — government officials and opinion-makers — who aren’t looking at this with a degree of schadenfreude,” Cheng said. “They already think the U.S. is in decline. If we really screw up the issue of our finances, China can go to its neighbors and say, ‘We’re number two, and we’re going to be number one.’ ”
Yet China has not shown a loss of appetite for stockpiling Treasury securities. In May, it increased its holdings for a second straight month, to a value of $1.6 trillion.
Economists said that move was not surprising. With the euro zone in turmoil because of the Greek debt crisis and Japan devastated by the March 11 earthquake and tsunami, China has few alternatives for its foreign exchange reserves other than the dollar, which, despite the impasse in Washington, remains the world’s most liquid and highest-rated currency, analysts said.