China's leaders sharply criticized Washington's government dysfunction in widely publicized comments, but they secretly are gleeful that the chronic crises emanating out of Washington helps elevate China in the world's eye as a much-needed source of stability while furthering Beijing's goal of posing an alternative to a U.S.-centric world economy.
As the largest buyer of U.S. Treasury securities, with about $1.5 trillion in holdings, China regularly warns against the perils of default, but its derision of Washington this time went much further.
Chinese Commerce Minister Mei Xinyu called this month's government shutdown and congressional politicking over the nation's debt limit "monkey business" that degrades the U.S. image around the world. He also warned that China would stop buying Treasury bonds if the U.S. ever defaulted, although there's no sign China stopped buying in the days leading up to the Oct. 17 deadline when the Treasury warned default was possible.
Many analysts agree that China, which will within a few years overtake the U.S. as the world's largest economy, stands to gain from the perennial crises in Washington that have become all too familiar around the world as U.S. politicians increasingly clash over their entrenched differences and leave unaddressed major national problems such as illegal immigration and unsustainable entitlement spending.
"With the U.S. seemingly pointing the gun at its foot and getting ready to pull the trigger" every year or so now, "that could play into China's hands," said Peter Thai Larsen, analyst with Reuters Breakingviews. "There are opportunities for China to show itself as being a stronger and more responsible" than the U.S.
China's leaders took advantage of President Obama's absence during the Asia-Pacific Economic Cooperation summit last week to play up China's increasingly dominant role as the engine of growth and trade in Asia. But beyond that, Mr. Larsen said, China hopes to encourage other nations to start using its own currency, the yuan, as a replacement for the U.S. dollar in world trade and banking.
"All of this will advance that agenda," he said, referring to the shutdown and deadlock that shook markets around the world in the past two weeks. "The geopolitics of it is, China can say 'Look, we have our own currency'" and point out how the yuan is increasingly being used in trade to avoid the volatility and instability of the U.S. dollar and securities markets.
The debt crisis did a lot to burnish the reputation of the yuan, which rose to a record high against the dollar during the shutdown, under the coaxing of Beijing authorities. China also authorized trading of the yuan for the first time in London last week, giving traders on Fleet Street a quota equivalent to $13 billion to invest in China's securities markets on behalf of clients around the world.
That was the latest step in China's gradual internationalization of the yuan, a liberalization of the fixed-rate and closed currency regime that puts it on the path toward being a more suitable alternative to the U.S. dollar. Outside China, the yuan previously could be traded only in Hong Kong and Singapore.
Some analysts say China's yuan or renminbi (RMB) is well on its way to replacing the dollar as the world's predominant reserve currency, though many others dispute that.
Bundesbank executive board member Joachim Nagel recently told Zero Hedge that the Chinese currency is "already well on its way to becoming one of the future global reserve currencies," thanks to its increasing convertibility. He noted that the percentage of world trade transactions that settled in RMB skyrocketed from near zero to around 12 percent in just two years between 2010 and 2012.
"China's success to date in internationalizing the RMB has had huge implications," said Anthony Harrington, an analyst with QFinance. Recent figures from the Bank of International Settlements "show that the RMB has finally made it into the league table of the world's most actively traded currencies."
Of course, the yuan still has a long way to go to displace the U.S. dollar, which can be used for payment or investment nearly everywhere around the world and is often sought out as an alternative to less-stable local currencies.
"At the moment, of course, the RMB is nowhere near open enough to be a reserve currency, but China's new Premier has plans to change all that," said Mr. Harrington.
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