China warns the US gubmnt to shape up or else. Or else what? [From WaPo, h/t Jack]
“China, the largest creditor of the world’s sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets,” Xinhua said.
The US is now in a position of being a recalcitrant teenager who sullenly sits through lectures from its parents but doesn't change its behaviour, knowing full well that the parents will do nothing to punish them if they don't change their behaviour.
What's China gonna do? Sell US t-bills and buy what? There aren't enough t-bills in existence from stable economies. In fact, compared with many Euro economies, US t-bills are looking pretty darned marketable.
So for the next five years, China (and others) may buy minisculely more Canadian or Australian or maybe even Japanese t-bills, but the demand for US t-bills is going to remain quite high (barring major fiscal fiascos). As a result, the US can continue its policy of debt-ceiling creep, and China will have little option.
For more on the US dollar as a reserve currency, see this. Look carefully at the graph there (reproduced below) and provide a better answer to what currency might serve as an international reserve currency. And note carefully that the Canuck buck doesn't even make the list.
Update: For more along the lines of what I've said, see this in Bloomberg:
Asian states are likely to retain their U.S. Treasury holdings for now and European governments have expressed confidence in the world’s largest economy after Standard & Poor’s cut the U.S.’s sovereign credit rating to AA+.
South Korea affirmed confidence in Treasuries after an emergency meeting of officials yesterday to prepare for any financial market fallout. Russia said the one-step cut “can be ignored,” and France questioned S&P’s reasoning. China’s official Xinhua news service said in a commentary that the U.S. must cure its “addiction” to borrowing.
For all the angst, policy makers across Asia are lured to Treasuries as a result of efforts to stem gains in their currencies against the dollar, which would impair export competitiveness.
As some of my former students asked in email and FaceBook, this response implies that the interest elasticity of demand for US t-bills is mighty low in this range.