US in Focus at IMF DC Meet, US Default Fraud with $16.7tn Debt Limit

China, the U.S.’s largest creditor abroad, urged American lawmakers opposed to raising the debt limit by 16 October to get out of the way.

China holds almost a quarter of foreign-owned Treasuries -- $1.28 trillion as of July.

The U.S. must “shoulder its responsibility” as the world’s biggest economy and holder of the main reserve currency and “take concrete measures before Oct. 17 to avoid a default,” Deputy Finance Minister Zhu Guangyao said at a briefing with reporters in Beijing in which he referred to “the attitude of the Tea Party.”

The appeal from China, the world’s second-largest economy, underscores the importance of U.S. Treasuries to global financial markets. Treasuries are viewed as a safe haven for countries trying to reduce risk, and any doubt about U.S. ability to pay its debt could rattle investors.

Lawmakers who identify with the Tea Party support decentralized government and less spending and debt. They pushed Republican House Speaker John Boehner last month to fight for major changes to the health-care law known as Obamacare as part of the budget debate.

The stalemate led to the first government shutdown since 1996 and has merged into a debate over the nation’s $16.7 trillion debt limit. Treasury Secretary Jacob J. Lew has said that if Congress doesn’t raise the debt cap, the U.S. will exhaust its borrowing authority by tomorrow, leaving the government with about $30 billion cash.

Japan, Chile

During International Monetary Fund meetings in Washington last weekend, officials from Japan to Chile emphasized the need to raise the debt ceiling.

Currency Basket – Dollar Alternative

“It’s no secret: There are discussions around the world where others would like there to be a basket of currencies that might be used as an alternative to the dollar,” Lew told the Senate Finance Committee last week. “The world actually counts on us being responsible.”

Tea Party members have accused the Obama administration of exaggerating the importance of the debt ceiling and say the Treasury could avoid a default by paying interest on debt before other bills.

China has been studying reducing its reliance on U.S. bonds in reserve management for years but has found few solutions, Li said in a phone interview.

China Holdings Grow

China’s holdings of U.S. government debt totaled 22.8 percent of all Treasuries held abroad, and have risen from $550 billion, or 21 percent, five years ago, according to Treasury Department data.

“Euro bonds may have the potential, but not for now,” Li said. “Diversifying into commodities can work in theory, but isn’t possible in reality because these markets are too small for China’s foreign-exchange reserves.”

China has $3.66 trillion in reserves, up from $3.2 trillion two years ago.

“China has no alternative to replace U.S. Treasuries in its foreign-exchange reserve management,” Yuan Gangming, a researcher with the government’s Chinese Academy of Social Sciences in Beijing, said in a telephone interview.

Dollar, who is now a senior fellow with the Brookings Institution in Washington, said China’s concerns are genuine and officials there “would like to see the U.S. resolve this as quickly and as smoothly as possible so that the world economy can continue to develop, and the dollar can continue to play its role.”