Mccarthy's House Rule Is A Gift To China| MENAFN.COM

Monday, 06 February 2023 06:59 GMT

Mccarthy's House Rule Is A Gift To China


(MENAFN- Asia Times)

TOKYO – In a year littered with economic and geopolitical landmines, China has at least one reason for optimism: Kevin McCarthy. Observers are plenty busy detailing why the US House of Representatives swinging to Republican control adds to Xi Jinping's long list of headaches.

Among the biggest: the risk has never been higher that Washington will for the first time default on its national debt. That's because House Speaker McCarthy's party forgets what happened the last time it played games with the debt ceiling .

In 2011, House Republicans tried to demand concessions from the White House, including spending cuts, before raising the government's legal borrowing limit. Standard & Poor's responded by yanking away Washington's AAA rating.

McCarthy's far-right party trying this stunt again is dreadful news for Asia, which remains slavishly dependent on the dollar and the securities issued by a government with a US$31.4 trillion debt load.

This“game of chicken” is about to roil global markets anew, says economist Gregory Daco at EY-Parthenon.“This,” Daco explains,“would mean an instantaneous cut to spending worth around 4.5-5.0% of GDP, leading to a self-inflicted recession and risking severe financial market dislocations.”

As traders from New York to Tokyo begin“front-running” this dynamic, volatile currency, bond and stock markets will alter the global growth outlook.

Strategist Brian Gardner at Stifel Nicolaus & Co's Washington office says this“dysfunction is a clear signal” and that investors“should be on guard as the summer approaches” because“brinkmanship over the debt ceiling could lead to market volatility .”

Together, Xi's China and Fumio Kishida's Japan hold about $2.2 trillion of US Treasuries now decidedly in harm's way. And for Beijing, this is a matter of déjà vu all over again.




US Treasury bond holdings could become more liability than asset. Photo: Screengrab / dontwasteyourmoney.com

Back in 2009, two years before S&P downgraded the world's biggest economy, then-Chinese premier Wen Jiabao made a remarkable plea to American politicians.

“We have made a huge amount of loans to the United States,” Wen said.“Of course, we are concerned about the safety of our assets. To be honest, I am a little bit worried.” He urged the US“to honor its words, stay a credible nation and ensure the safety of Chinese assets.”

This was roughly a year after the“Lehman shock” savaged world markets and forced Washington to borrow aggressively to stabilize a stumbling economy. Two years later, Wen looked downright clairvoyant when S&P called the Republicans' bluff.

In 2011, Beijing officials reminded Washington that its top bankers in Asia had some leverage, too.

As the official Xinhua news agency argued that year, china has“every right now to demand the US address its structural debt problems and ensure the safety of China's dollar assets. International supervision over the issue of US dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country.”

This latter argument is more valid than ever as McCarthy's party puts Asia's ginormous US Treasuries holdings at risk. In the countervailing years, the yuan's role in global trade and finance has risen exponentially. Beijing also is beating Washington to market with a central bank digital currency.

Yet the longer-term benefits to Xi's economy outweigh the short-term noise sure to emanate from Capitol Hill. Eurasia Group CEO Ian Bremmer flagged this scenario, listing the“Divided States of America” among the firm's top 10 risks this year.

“The 2022 midterm elections ,” Bremmer says,“halted the slide toward a constitutional crisis at the next US presidential election as voters rejected virtually all candidates running for state governor or state attorney general who denied or questioned the legitimacy of the 2020 presidential election.”

But, Bremmer warns,“the US remains one of the most politically polarized and dysfunctional of the world's advanced industrial democracies heading into 2023.”

“Extreme policy divergences between red and blue states will make it harder for US and foreign companies to treat the United States as a single coherent market, despite obvious economic strengths. And the risk of political violence remains high,” Bremmer said.

Financial violence, too, as the coming debt ceiling brawl gets ugly. Asia is way ahead of US President Joe Biden in worrying a default would mean“calamity” for the global economy.

For now, Secretary Janet Yellen's team at the US Treasury Department has roughly $500 billion worth of accounting measures available to pay Washington's bills until McCarthy's gang tries to strike a deal. It could get very messy indeed.




Janet Yellen participates remotely in a Senate Finance Committee hearing in Washington. Photo: AFP / Anna Moneymaker / Pool

But the ways in which McCarthy's caucus are about to damage Washington's credibility play right into Xi's hands as he begins his third five-year term.

Some foresee a two-year stretch that's just as chaotic as Donald Trump's 2017-2021 presidency. Xi's government didn't enjoy the trade wars or anti-China social media rants, but the Trump era did more damage to US relationships around the globe than China's economy.

For China, Trump was“the gift that keeps on giving,” argues Minxin Pei, professor of government at Claremont McKenna College in California.“His calamitous response to the covid-19 pandemic” made China, whose government often mishandled the outbreak“look like an exemplar of effective governance.”

Moreover, Pei adds,“Trump's 'America First' foreign policy alienated traditional US allies, making it difficult to build a broad coalition to counter China.”

To be sure, Pei notes, Trump“delivered painful blows,” including“demolishing US-China commercial relations, and support that“infuriated Chinese leaders.” But Trump's“election meltdown” was a gift to a Communist Party keen on casting democracy as a poor model for China.

By refusing to accept the outcome of the November 2020 election, working tirelessly to delegitimize voting and causing a legitimacy crisis for the Supreme Court, Pei notes, the long-term damage done by Trumpism may have been worth the hassle for Xi's government.

Now, 100-plus lawmakers who enabled Trump's election lies are in the House majority and threatening to toss a financial bomb into markets as debt limit brinkmanship heats up.

All this is dollar negative. The volatility will increase exponentially if Congress draws the ire of analysts at S&P, Moody's Investors Service or Fitch Ratings. Already, there are clear signs Washington's top holders of US Treasuries - Japan and China - are reducing their dollar exposure.

Earlier this week, Yellen called on McCarthy's party to remove the sense of dread hanging over markets.“I respectfully urge Congress to act promptly to protect the full faith and credit of the united states ,” Yellen said.

Many Asia observers worry that McCarthy's very weak hold on the speakership makes him too susceptible to extremists than Republican leaders were in 2011.

“We appreciate that the market has become numb to warnings of debt ceiling defaults because both parties have crept up to the brink without a material default,” says analyst Jaret Seiberg at Cowen Washington Research Group. But“this time is different. In prior fights, neither side wanted to default.”

Bottom line, Seiberg says,“we believe this needs to be on the market's radar now before there is a crisis.”

McCarthy's weakness also might soften the blow should he visit Taiwan soon. Last year's Taipei visit by then-Speaker Nancy Pelosi raised the bar for her successors to follow suit. But Pelosi had the near-complete support of her then-ruling party and at least the tacit approval of the White House.




US House Speaker Nancy Pelosi and her delegation leave Taipei on August 3, 2022. Photo: Taiwanese Foreign Ministry / Handout

As such,“China's response could be somewhat less severe,” says analyst Clayton Allen at Eurasia Group. Part of this might be ongoing efforts to stabilize relations” by Xi and Biden, Allen says.

And, of course,“Beijing's understanding that McCarthy, as the leader of the opposition party, is not an emissary of the White House.”

The messiness of McCarthy's coalition, and the extremism inherent to it, also means any Congressional attempt to bring Beijing to account for starting the Covid-19 pandemic will likely be less coherent and lack any real teeth.

The more McCarthy's Republicans show the world's biggest economy to be in chaotic hands, the more Xi's China can sit back and watch its main rival relinquish its global clout in real-time.

Follow William Pesek on Twitter at @williampesek

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