Connect with us


Silicon Valley Bank crisis and the impact on China’s banking sector

Avatar photo



The crisis of the collapse of the “US Silicon Valley Bank” began after the US authorities announced on Friday, March 10, 2023, the closure of the “Silicon Valley” bank, which is close to the US official technology community, after the bank suddenly found itself in a state of bankruptcy, and here many feared that there would be consequences of the bank’s collapse in what is known as the “domino effect” on other banks in the United States of America and abroad around the world.  As a result, the clients of the US Silicon Valley Bank, most of them from technology companies, began to withdraw their deposits, in light of their need for liquidity to obtain the necessary financing for their projects, which prompted the US Silicon Valley Bank to sell the bonds, despite not achieving any significant gain, and at a loss in order to cover  Withdrawals by clients and clients who deposit with it, especially in its branches spread in Europe and around the world.

 It is considered the main reason for the collapse of the US Silicon Valley Bank, after the US Federal Reserve raised interest rates a year ago to curb inflation occurring in the US and globally.  But high borrowing costs have depleted private equity in the digital and technology industries, from which Silicon Valley Bank was benefiting. The high interest rates also eroded the value of long-term bonds, which were devoured by the US Silicon Valley Bank, along with a number of other banks.

 Therefore, the US Deposit Administration entrusted the Federal Deposit Insurance Corporation in the United States of America to prevent the spread of the impact of the collapse and bankruptcy of the “Silicon Valley Bank” on all banking sectors and the American digital and technological transformation sectors.  The American “Silicon Valley Bank” is seen as one of the main banks that provide loans to emerging companies in the field of technology, innovation and digital transformation in the United States and abroad as well, in addition to its strong ties with venture capital companies around the world. Therefore, the repercussions of the bankruptcy crisis and the collapse of the US Silicon Valley Bank have become significant for some banking sectors around the world, given that the bank owns several units and shares in Canada and Europe, in addition to the existence of a joint venture in China itself.

 It is worth noting here that the technology sector in China is the main engine of growth in the country, while it enjoys strong ties with economic entities in the “American Silicon Valley”, in addition to the fact that many emerging companies based in China have accounts in the “Silicon Valley” bank.  The same American.

The crisis of the collapse of the “American Silicon Valley Bank” extended to the banking sectors of many countries, such as the British banking sector as the largest partner of its American counterpart, so the British authorities tried to quickly remedy the matter by committing the British government to work on developing a plan that would allow British technology companies to maintain their liquidity after the bankruptcy of the bank of “American Silicon Valley”, especially after it was noted that the reports of depositors’ letters to the “American Silicon Valley Bank” branch in Britain were late in arriving.

  In my opinion, China was not greatly affected by the collapse and bankruptcy of the “Silicon Valley Bank”, according to the estimates of the banking authorities and the banking and government banking sectors in Beijing, which confirmed that the repercussions of the bankruptcy of the “Silicon Valley” bank on Chinese financial institutions are “very limited” so far.  The Chinese government stressed that “Chinese banks are very strong and stable and have resilience compared to their American counterparts” and that any collapse of the US bank “had no significant impact on the Chinese banking system”. China’s official banking indicators also showed an increase in stock prices in China and Hong Kong on Monday, March 13, 2023, immediately following the announcement of the collapse of the US Silicon Valley Bank.

  On the other hand, we can analyze the situation more accurately by emphasizing that the collapse of the US “Silicon Valley Bank” came as a strong blow to the US economy and banking sectors around the world and the loss of confidence in the continuation of the US digital technology sector to lead the digital technology and artificial intelligence sector compared to China.  Therefore, the United States government tried to remedy the situation globally by pledging the American authorities to take steps to protect the funds of depositors in the “Silicon Valley” bank after declaring its bankruptcy, and the confirmation of the American authorities that the losses will not be borne by taxpayers, with personal reassurance from President “Joe Biden” to all American citizens that their banking system is safe and will not be affected by the Silicon Valley collapse.

   According to my analysis, China will benefit greatly from this American crisis in attracting more investors in digital technology sectors around the world, especially after China’s success in developing new technology sectors and modern digital transformation to develop its production and transform its cities into innovation centers that compete with the “American Silicon Valley” globally.  Technological innovation is no longer a monopoly only on the American Silicon Valley, after the success of a number of Chinese cities in establishing giant technological and digital research and development centers, especially after the crisis of the Corona pandemic (Covid-19) and the resulting need for rapid digital transformation and the development of artificial and cyber intelligence technology in all sectors.  sectors in the Chinese state, as well as the experience of digital transformation in cities and rural villages in China, so China has established several giant technology and digital companies to pump capital and bring in the best Chinese and international talents to localize and transfer American and global technology inside China.

  China’s entry into a “new technological and digital age” is part of Chinese President Xi Jinping’s thought to achieve “the Chinese dream of rejuvenating and rejuvenating the Chinese nation”. Technological and digital innovation and development in China is an engine of the global economy, and the transformation of Chinese cities plays a decisive role for China to become a major technological and digital power in the world, competing with major American and international companies operating in the innovation and digital technology sector.

  Hence the “Silicon Valley” collapse crisis affected the banking sectors in the whole world to varying degrees or in one way or another, with the exception of China due to the strength of its banking sector and digital technology, which came with the interest of Chinese President “Xi Jinping” and the leaders of the ruling Communist Party in China in digital transformation.  And innovative in all Chinese sectors, and this was confirmed by the meetings of the two sessions or sessions “Lianghui” this year 2023 of the National People’s Congress and the Chinese People’s Political Advisory Council, by emphasizing the necessity of digitally transforming all Chinese sectors and cities using artificial intelligence technology. Therefore, Chinese cities began to promote this digital momentum to create work environments that attract a third of global technology companies to have headquarters in China. China, along with the United States of America, includes 80% of the emerging companies in the digital transformation technology sector, which have a value of about one billion dollars.

 The city of “Fujian” is the second largest market for export, digital and technological trade in China, and the “Pluto Free Trade Zone” is the center of global digital trade in China.  The Chinese to “establish an industrial complex for cross-border e-commerce as a headquarters for the export of digital technology around the world, and it is the second branch of the ‘EBay’ company after its branch in the city of “Shanghai”, China. In view of the activity of the city of ‘Fujian’ in the digital technology industry sector, it was chosen to establish the first “Institute for Innovation” for “Microsoft International”. China has also made Fujian the seat of the “First Digital Summit” and a showcase for showcasing the gains of the development of the Chinese digital economy around the world.                     

 The Chinese government has sought to create development zones to be the headquarters of Chinese companies, such as the Chinese “Xiaomi company”, and even American giants such as “Google” have established “research and development” centers in China.  China has succeeded in concluding many deals, establishing and financing emerging companies in the technology sector and digital transformation. Moreover, the affordable cost of living provides businessmen, workers and foreign investors in China with an attractive work environment for their investments in the sectors of technology and new digital transformation, which are factors I have taken into consideration.  The largest technology companies in the world, such as the “Expert Market” company, to indicate that the Chinese capital, Beijing, and Silicon Valley are a global technological hub.  The Chinese government’s provision of jobs in the technological and digital sector led to a structural transformation in the Chinese economy as a whole, and also had an impact on the rise in wages in Chinese cities, and because of it, Beijing occupied the forefront as the richest city in China and the world.

  Technological innovation is no longer confined to Silicon Valley only, as Chinese and international start-up companies have chosen a number of Chinese cities as the headquarters for establishing their research centers, creating technological hubs with a strong injection of capital and creating conditions to bring in the best talents.  Foreign capital is mainly concentrated in several major regions whose local economy is compared to the gross domestic product of industrialized countries. The Chinese technology titans, the drivers of China’s digital transformation, are driving economic development in these cities. The technology industry and digital transformation in China are concentrated in the regions of the Yangtze River Delta, which includes (Shanghai, Suzhou, Hangzhou, Wuxi, Ningbo, and Changzhou), with investment rates estimated at about $3 billion, which is equivalent to the economy of a country like Italy in particular, while the region is located the third major city for technology industry and digital transformation in China on the “Pearl” River Delta, which includes cities of (Hong Kong, Guangzhou, Shenzhen, Fujian, Dongguan, Macau).

   Finally, according to my analysis, there are a number of lessons learned for the Chinese banking sector to learn from the crisis of the collapse of the US Silicon Valley Bank, by working to continuously secure its conditions by developing a plan that allows Chinese technology companies to maintain their liquidity permanently, in addition to the need to reduce interest rates on borrowing.  Continuously, in view of learning and benefiting from the crisis of raising the value of interest rates by the US Federal Reserve, which resulted in that major crisis within the US banking and banking sectors, led by Silicon Valley Bank. It has also become imperative for banking regulators in China to request major banks to retain large additional capital to be used in the event of a sudden crisis that may strike the banking sectors in the Chinese state and the world, such as the crisis of the spread of the Corona pandemic (Covid-19) and the crisis of the collapse of the American Silicon Valley Bank, with its implications. It has global extensions, and this is indeed what all recent experiences have highlighted, which indicate the success of the Chinese banking sector in dealing with any sudden crises.

Associate Professor of Political Science, Faculty of Politics and Economics / Beni Suef University- Egypt. An Expert in Chinese Politics, Sino-Israeli relationships, and Asian affairs- Visiting Senior Researcher at the Centre for Middle Eastern Studies (CMES)/ Lund University, Sweden- Director of the South and East Asia Studies Unit

Continue Reading


How Saudiconomy, is an economic-transformational miracle?

Avatar photo



Saudi Cabinet session. image Source: Saudi Press Agency

What is happening in the Global economy? The outlook seems entirely iffy, in the state of flux and bewildered with negative outlooks. The answer is, “Disturbance”. If we analyze the global-environment with respect to economy, we find it clouded with discussions pertaining to hawkish vs. dovish trends of central-banks, rising inflation, hyper-inflation, tanking GDP growth, Russian-Ukraine conflict, energy-crises, broken supply-chains, unemployment, recession-fears, supply-shocks, lower demands, inverted yield-curves, liquidity crises, banking debacles and many other ensuing economic-ramifications etc. all have become talk of corridors and towns.

In my opinion, the global economy seems in shambles, extrapolated perceptions assumed by analysts out of Jackson Hole meetings and other developed-countries’ central-banks are creating disturbances in financial-markets. Simply, the world is devoid of any solid vision, which could steer it towards betterment and prosperity. Major financial newspapers are dreading with inflation impacts. Ask any banker across the globe about his or her medium-term economic-outlook & you’ll get an ugly picture painted.

Welcome to Saudi Arabia, the year 2022 the country surpassed a mark of a trillion-dollar economy according to both IMF and Oxford Economics coupled with GDP which grew at 8.7% in 2022. The annual CPI in Saudi Arabia  increased by 2.5% and inflation averaged at 2.47% in 2022 which is “absolutely nothing” against double-digits’ inflation worldwide.

So paradoxically asking, what is happening in Saudi Economy? The answer is, “Growth”. If we analyze Saudi economic ecosystem, we find it filled with positive economic-vibes where the discussion is all about hike in industrial-production, foreign-investment-inflows especially huge industrial-investments, mining-investments which aim to unleash the potential of natural-resources, infrastructure-investments, giga-projects, achievement of economic & financial targets on time, flourishing private-sector, multiplying Non-Oil GDP etc.

Taking global-view, H1+H2 of 2022 were clouded with immense geo-political tensions, with ultimate economic-ramifications. But KSA has remained insulated of all global economic-vagaries, which attests the resilience & robustness of Saudi economic framework which is strengthened by Saudi leadership. The fiscal-year 2022 attracted significant foreign capital-inflows, which proves that Saudi Arabia has successfully positioned itself as a desired-destination of global financial-capital amid the ongoing global-turbulence. Saudi Arabia has successfully averted economic-effects of current geo-political turmoil, in terms of utilities, food-security and inflation-containment etc.

The question arises, how did KSA achieve this economic excellence & resilience in really a short time-span? The answer is, a Vision is being implemented and realized by Saudi leadership with sheer commitment and enabled by Saudi youth. This trifecta is indeed a global successful case-study of how major economic-transformations can happen in a short-period of time.

Delving into more details, the fundamental reason is, in 2016 Saudi Arabia had devised a brilliant Vision 2030 under the leadership of H.R.H King Salman and this was a road-map drawn by H.R.H Crown Prince Mohammad Bin Salman, as a forward strategic-economic framework. Under this brilliant vision, uniquely-crafted “Vision Realization Programs” (VRP) were designed, each tasked with a particular niche to smoothen the regulatory-processes, incentivize deployment of local-resources and ultimately attract private-sector & foreign-investments. All these VRPs are showing satisfactory-progress and many of these VRPs have over-achieved brilliantly.

Another driver of this economic-success is a significant-emphasis on optimizing potential of “Non-Oil GDP”. It is the Non-Oil GDP, which ultimately provided an impetus and incentivized Saudi Private-sector to act proactively. The fuel for sky-rocketing “Non-Oil GDP” is actually the giant private-sector of KSA, whose potential is being unleashed by Saudi government via launching a partnership-program namely “Shareek” which aims to intensify the potential of SAR 5 trillion of domestic private sector investments by 2030. The aim is to maximize the private-sector contribution up to 65% in Saudi GDP by 2030.

One of the attributable reasons of this economic-miracle of Saudi Arabia has been a constant emphasis on Higher Education & Research. For instance, scholarship programs for Saudi students proved to be a stellar success. Today we see countless highly-qualified Saudis, possessing valuable global-experience are now steering many organizations in both the public and private sector of country. Their competence coupled with determination, passion & loyalty for their leadership and the country paved the way for Saudi Arabia to result such an economic-success. Nature Index which tracks scientific & intellectual contributions globally has ranked Saudi Arabia, 1st in Arab World & 30th globally in 2022, which manifests emergence of high quality scientific-output by Higher education ecosystem.

Saudi Arabia was one of the countries, which made headlines across global-media due to smart Covid-management, leaving behind many developed economies. For instance, King Abdullah Port has bragged the 1st-position leaving behind 370 global-ports in a globally-renowned index, Container Port Performance Index – 2021 by World Bank and S&P Market Intelligence, which analyzed performances of 370 ports in post-Covid broken supply-chain scenario. Similarly, Jeddah Islamic port and King Abdul Aziz port have bragged 8th and 14th position respectively.

Saudi Arabia’s Sovereign Wealth Fund, Public Investment Fund has emerged as one of the smartest-SWF leaving behind many decades-old SWFs with stellar investments. The PIF     (AuM = 620 USD billion) with its in-built strong potential has taken lead in investing locally in Saudi Arabia. In any country, a monetary-system always carries immense importance in proper functioning of an economy & solidifies its robustness. This important task is being carried out diligently by Saudi Central Bank, SAMA, which is brilliantly regulating Saudi financial-sector.

Saudi Arabia is taking a lead in developing state-of-the-art infrastructure. Each of the giga-project is adding gross-value of billions of SAR directly to economy and is providing thousands of jobs. I call them; “Super-infrastructure” because they are being developed with a super-vision, led by super-teams, giving super-results and yield a super-future. Recently Knight Frank which is a top-notch and a century-old UK-based real-estate consultancy firm has evaluated the 15 giga-projects up to 1.1 trillion dollars.

Indeed, Saudi success story of economic-transformation and diversification embodies sheer brilliance, commitment and determination, which has manifested wonders in less than a decade as appreciated by the Managing Director of IMF in the recent WEF sessions, in these words, “They (Saudis) are using the increase in revenue very effectively to create the investment environment for future growth for diversifying the economy,”

Continue Reading


Economic Strangulation Policies to Impact Kashmir Socio-Economic Dynamics

Avatar photo



For decades, India has implemented coercive economic policies in the estwhile state of Jammu and Kashmir, a region that has been the subject of a longstanding dispute between India and Pakistan since their partition in 1947. Despite ongoing efforts to suppress the aspirations of the Kashmiri people, including economic deprivation, one of the most significant examples of India’s economic coercion in the region has been the imposition of an economic blockade.

In 2019, the Indian government further intensified its efforts by revoking the special status of Jammu and Kashmir, which had granted the region autonomy to determine its economic policies. This move was accompanied by a curfew and communication blackout that effectively isolated the region from the outside world, further exacerbating the economic hardship faced by the people of Jammu and Kashmir.

The blockade has had a devastating impact on the economy of IIOJK. The region’s tourism industry, which was a major source of revenue, has been decimated. The Indian government has also seized control of the region’s industries, including its mineral and agricultural resources. The region’s apples, for example, are a major source of revenue, but Indian authorities have blocked their export to the rest of the country, causing huge losses to the farmers.

India has also used other economic measures to exert control over the region. For example, the Indian government has placed restrictions on the movement of goods and people across the Line of Control (LoC) that divides the region between India and Pakistan. This has made it difficult for businesses to import and export goods, as well as for people to visit their families and friends on the other side of the LoC.

In addition, the Indian government has used financial measures to suppress dissent in the region. Indian authorities have frozen the bank accounts of individuals suspected of involvement in anti-India activities. This has made it difficult for these individuals to access their own funds, as well as for others to conduct transactions with them.

India has also used its control over the region’s financial institutions to exert pressure on the Kashmiri people. For example, Indian authorities have pressured banks in the region to refuse loans to individuals suspected of anti-India activities. This has made it difficult for these individuals to start businesses or invest in their communities.

The application of economic strangulation policies in IIOJK is expected to have a substantial impact on the socio-economic dynamics of the region. These policies are aimed at restraining economic activity and growth, and they are likely to result in various harmful consequences for the people of Jammu and Kashmir.

The primary effect of these policies will be an increase in poverty and unemployment rates. As businesses struggle to function and create employment in an environment of economic uncertainty, a considerable number of people will find themselves out of work and grappling to make ends meet. This is likely to intensify the existing social and economic disparities in the region.

Another probable outcome of the economic strangulation policies is a decline in the living standards of the people. As economic activity slows down, prices of essential goods and services are likely to surge, making it difficult for individuals to obtain the basic necessities of life. This could potentially result in a surge in social unrest and political instability in the area.

Additionally, the economic strangulation policies may lead to a decrease in the overall standard of healthcare and education. As the government diverts resources away from these sectors to impose economic sanctions, hospitals and schools are likely to face reductions in funding and staffing, thereby leading to a deterioration in the quality of these essential public services.

Top of Form

So far, the impact of India’s economic coercion on the people of IIOJK has been devastating. The region’s poverty rate is estimated to be around 30%, and unemployment is rampant. The lack of economic opportunities has led many young people to join freedom fighters, which have been fighting for Kashmiri independence from India for decades.

India’s economic coercion has also had a profound impact on the mental health of the Kashmiri people. The curfew and communications blackout imposed by India in 2019, for example, left many people feeling isolated and helpless. The lack of economic opportunities has also led to high levels of stress and anxiety among the region’s youth.

The international community has condemned India’s coercive policies in IIOJK but is not willing to pressurize India over human rights violations. The United Nations has called for a peaceful resolution of the Kashmir dispute, and has urged India to respect the human rights of the Kashmiri people. The Organization of Islamic Cooperation (OIC) has also expressed its concern over the situation in the region.

Pakistan has been vocal in its condemnation of India’s actions. The Pakistani government has called on the international community to intervene in the dispute, and has urged India to withdraw its military forces from the region.

One of the recent policies of economic strangulation in IIOJK by India is the implementation of new land laws in the region. In October 2020, the Indian government issued new land laws that allow non-residents to purchase land in the region. This decision has been met with widespread condemnation from Kashmiri political leaders, who argue that it will lead to demographic change and the loss of control over their land.

Kashmiri leaders from mainstream political parties have also rejected the decision of the Indian government to levy taxes in the region without representation. The slogan “No taxation without representation” has been used by these leaders to argue that the Indian government has no right to impose taxes on the people of the region without their consent.

The argument put forth by these leaders is that the Indian government has violated the basic principle of democracy, which is that the people have the right to elect their own representatives who can make decisions on their behalf. By imposing taxes without representation, the Indian government has effectively denied the people of IIOJK their democratic rights.

The Kashmiri political leaders have also argued that the Indian government’s decision to levy taxes without representation is a violation of international law. The International Covenant on Civil and Political Rights, which India is a signatory to, guarantees the right of all peoples to self-determination. The Kashmiri leaders argue that by imposing taxes without representation, the Indian government is denying the people of IIOJK their right to self-determination.

The Kashmiri leaders have also pointed out that the Indian government’s decision to impose taxes on the region without representation is a continuation of its policy of economic strangulation in IIOJK. They argue that the Indian government’s actions are designed to suppress the aspirations of the Kashmiri people and to maintain its control over the region.

Overall, the impact of the economic strangulation policies in IIOJK is likely to be extensive and severe, affecting not only the economic but also the social and political structure of the region. The people of Jammu and Kashmir are likely to face various challenges in the upcoming years as they strive to adjust to this new reality, highlighting the need for the international community to closely monitor the situation and take action to support those affected.

Continue Reading


U.S. Is Threatening to Default China Debt Repayment, What Will Beijing Do?

Avatar photo



Under Xi’s decade-long rule, China’s holding of US Treasury debt has been consistently declining, last year it fell by $173.2 billion – 17% of the total holdings of the US bond by China. This was the largest annual reduction in six years when the Chinese holdings were reduced by $187.6 billion in 2016. Experts reckon China will continue to reduce its holdings of US Treasury holdings in 2023. However, clamoring for selling US debt as soon as possible is growing by the day in China.

Financial experts say the ramifications of the continuing US-China political rivalry are now increasingly being manifested in arenas other than geopolitics – in the speeding up of the Renminbi’s exit from the dollar. International Capital Statistics (ICS) released by the US Department of Treasury this February show China’s holdings of US treasury bonds stood at $867 billion at the end of December last year – a month-on-month fall for five consecutive months. Viewed from escalating political hostility, this decline is a new low since Xi Jinping was installed as the party general secretary at the CPC 18th Congress in October 2012. Remember, this was also the time when the Obama administration had launched its China containment strategy, called the “pivot to Asia” policy.

Analysts point out, though the reduction in China’s holdings of US bonds last year is normal when compared with the overall 6% decline in the holdings of US treasury bonds in overseas countries, what is alarming is the decline in China is more prominent. Following the rapid raising of the interest rates by the US Federal Reserve Bank (FRB) last year, the 10-year Treasury yield – an indicator of US long-term interest rates, rose from about 1.5% at the end of 2021 to nearly 4% by the end of December month last year. Soon after the US Department of Treasury made public the ICS for the year 2022 on February 15, a Nikkei Asia analysis on its Chinese website stated, the sharp decline in China’s holdings of the US Treasury bonds was to avoid losses caused by rising interest rates.  

Yellen: We Won’t Allow China Get Repayment Benefits

More interestingly, citing a large US bond management company the article further pointed out the US sanctions on Russia after the outbreak of the Russo-Ukraine war as one of the leading factors behind China’s move to reduce holdings of US Treasury bonds. “China has raised its vigilance against similar measures being taken when the confrontation between China and the United States deepens in the future,” wrote. As has been widely reported, top US officials including Antony Blinken and Janet Yellen have repeatedly said the US wouldn’t hesitate to sanction Chinese entities if Beijing aids Russia in the war against Ukraine.

A similar argument has been put forward by the mainland Chinese professor of economics Cao Xing last Sunday. Weary of the US game-playing on debt repayment (to China), Professor Cao said it’s time for China to clear its US debt. Earlier in February, when US Treasury Secretary Yellen in a stark statement said, “China cannot be allowed to get the benefits of repayment,” Cao described the blunt remark as symbolic of the US determination to politicize the issue. In his popular signed blog “Professor Cao Xing,” he wrote: “The debt scale of the United States has exceeded the debt ceiling of $31.4 trillion. On top of this, the ongoing banking system crisis has put everyone in the US financial sector at risk.” Cao went on to add.  

Will US Actually Default China Debt Payment

At another level, a serious debate is unfolding among global fund management strategists in the US on the likely ramifications for the global economy in general and China in particular, if the United States debt default on the People’s Republic. In the opinion of Arthur R. Kroeber, a Washington-based independent economic researcher, and Editor of China Economic Quarterly – a publication of a global economic research firm, GaveKal Dragonomics, a big political drama promises to take place in the next few months over the federal debt ceiling – the GOP strongly opposed to raising the ceiling on the one hand, and the US Treasury defaulting on its debt on the other hand.  

Disagreeing with those who argue the US Treasury bond “political drama” is merely politicking, such as Arthur Kroeber, professor Cao not only takes every word uttered by Secretary Yellen very seriously (that she won’t allow the US to pay up the Chinese debt), but he is also quite apprehensive that Yellen’s real purpose is to pressure and trick China into increasing its holdings of US debt.    

Furthermore, the Wall Street Journal disclosed in a report the US deputy assistant secretary of the Department of Treasury for Asian Affairs, Robert Kaproth, visited Beijing in February last week to discuss macroeconomic and financial issues. Speaking about Kaproth’s visit, Professor Cao has revealed the “secret” mission Kaproth undertook to Beijing actually had only one agenda, i.e. to hope China would increase its holdings of US debt, but China obviously did not make any concessions.

Renminbi versus US Dollar

According to experts in China, the gradual yet continuous decline in China’s holdings in US Treasury bonds is increasingly causing concerns in the United States. In the past decade or so, China has reduced its holdings of US debt by 34%; China currently holds $859.4 billion US debt which is at the lowest since 2009. Analysts in China say, the US fear is China will drastically reduce its US debt holdings to as low as $100 billion. Earlier on, before the visit to China by Blinken became a casualty to the “spy balloon” drama, Treasury Secretary Yellen was to accompany the Secretary of State.

Yellen’s chief mission to visit Beijing in early February was to resume discussions with her Chinese counterpart, Vice Premier and China’s economics tsar Liu He – left off in Yellen-Liu meeting this January in Switzerland – to “deter” Beijing from further selling its holdings of the US bonds. It was precisely to achieve the agenda of preventing continuous decline in China’s holding of US bonds that Yellen had announced US will not let China enjoy benefits of “repayment.” It is this naked display of the US determination to default on the Chinese debt which might lead Beijing to create a substitute system to dollar by internationalizing the renminbi.

By Defaulting, Is US Aiming At Regime Change In China

In short, as Kroeber has wondered, the consequences of the US debt default may not be threatening regime change, instead it will be damaging enough to destabilize the renminbi. It is pertinent to mention, in the event of a global meltdown caused by the US federal government shutdown (if it happens, it will occur in coming June), unlike during the 2008-2009, this time Chinese economy would be hurt a lot. For two reasons, back in 2008-2009 the Chinese Communist Party quickly unleashed a massive debt-financed economic stimulus program; second, fifteen years ago, the country’s debt level at 140 percent of GDP was rather low, but today its debt has soared to 300 percent of GDP.  

Finally, experts in China are fully aware of the limitations to internationalize the renminbi, just to mention a few: unlike the US dollar, the renminbi is by far hugely insulated from global financial shocks, and to bring money in and out of China requires permission from Beijing (a.k.a. capital controls); like the US dollar is considered the world’s lynchpin currency, the renminbi is not; the renminbi accounts for just 2.8 percent of global official central bank reserves as compared to 60 percent and 20 percent for the US dollar and euro, respectively. Without a doubt, therefore, Cao and many Chinese experts are clamoring for an easy and quick way out: since the US has made it clear Washington won’t repay Chinese debt even if it has the money, the best solution for Beijing is to at once clear all of US Treasury bond holdings. But can China, do it?

Continue Reading