China says a U.S. default is 'playing with fire'

Chinese and United States flags fly side-by-side outside the White House ahead of the visit of Chinese President Hu Jintao to the U.S. January 18, 2011 in Washington, DC. Hu has arrived in the United States for an official visit and is scheduled to visit the White House for a private dinner Tuesday night and more meetings on Wednesday.

JEREMY HOBSON: As Vice President Biden convenes yet another bi-partisan meeting today to try to reach a deal to raise the federal debt limit, there's a warning from one of America's biggest creditors: China, which holds more than $1 trillion of U.S. debt.

Marketplace's Amy Scott joins us live with the details. Amy -- what is Beijing saying?

AMY SCOTT: Well in a press briefing yesterday a foreign ministry spokesman took a moment to address the fiscal situation here in the U.S. as we near that deadline to raise that debt limit. If we were to miss the deadline we wouldn't be able to pay bills on some of our bonds, including to the largest buyer of those bonds - China. Meanwhile, a Chinese central band adviser said a default would be "playing with fire."

I talked to Glenn McGuire, Asia chief economist at Societe Generale Hong Kong. He says a short-term default would set a dangerous precedent.

GLENN MCGUIRE: We well could see a series of rolling defaults, which would ultimately erode one, the value of the U.S. Treasury instruments, and two, the U.S. dollar. So it would be a double whammy for China in that sense.

And what he means by rolling defaults is that every time we get close to the debt ceiling, this could become a short cut to avoid meaningful reforms.

HOBSON: And Amy, the Treasury Secretary has said August 2 is the deadline to raise the debt ceiling before we start defaulting. There's still no deal. Is China right to be worried?

SCOTT: The idea is gaining some traction among republican leaders. You know they see it as a way of forcing deep spending cuts. But even a default of a couple of days, China says, could destabilize the global economy.

HOBSON: Marketplace's Amy Scott, thanks so much.

SCOTT: You're welcome.

About the author

Amy Scott is Marketplace’s education correspondent covering the K-12 and higher education beats, as well as general business and economic stories.

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