Heated arguments. Name-calling. Sudden exits. Drama and disquiet have been par for the course in Washington these days as the August 2 debt ceiling deadline draws nearer. Americans, for the most part, are used to the fractious nature of Congress and might argue it's all worth it in the name of democracy. But China—which buys more of America's debt than any other country—sees it differently.
In the past few weeks, both Republicans and Democrats have warned about what could happen domestically if Congress and President Obama don't reach a deal to raise the debt ceiling. Social security and unemployment checks won't come. Parts of the government will shut down. Interest rates will go up. Spending could spiral even more out of control. But perhaps worst of all, countries around the world will no longer see American Treasuries—and America itself—as the world's safest place to park money. For China, which some experts say is bent on discrediting America's democratic system, that potential weakening of America could be an ego boost back home.
"To the extent that China ever looked at democracy as a venerable institution, they're kind of revising their opinions on things," says Charles Freeman, the Freeman Chair in China Studies at the Center for Strategic and International Studies. "What's been happening for the past couple years really is a relative sense of Chinese superiority and a relative U.S. decline, and this would certainly reinforce that."
Already there's been some indication. Mirroring downgrade warnings from two of America's top credit agencies, Moody's and Standard and Poor's, Chinese rating company Dagong weighed in Thursday, placing the United States' sovereign credit rating on its "negative watch list." With the move, the company released a sour report of the American economy. Dagong wrote about "the industrial hallowing-out" and "a lack of endogenous driving force" within the American economy, highlighting the "insufficiency of the U.S. capability to create real wealth." It also criticizes "the government's insufficient economic management capability."
A report released Thursday from Reuters suggests that Dagong itself has a questionable standing among its peers worldwide. But, even so, such talk within China's borders could affect how the United States is viewed there. "They're very worried about the level of friction they're seeing over the issue," says Freeman. "Before the financial crisis, they looked at us [like] we had all the answers. Sometimes what we did didn't make sense, but [they thought] there must be some underlying strategy to it. These days, they're just looking at us and going, 'Gosh, these guys are just a chaotic mess."
Illinois Republican Sen. Mark Kirk, co-chair of the Senate's U.S.-China working group, says that although China is set to eclipse the United States as the world's leading economic power by around 2025, it is still very much an export-dependent economy. The possibility of American default, then, has them worried. "China is overwhelmingly becoming a status quo power, whose interests are in stability. When they look at the U.S. debt debate, I think their strongest interest is in a smooth transition, so they do not want to see a world in which both the Euro and the dollar are in crisis," he says.
Despite perceptions, the reality is that U.S.-China business ties won't likely change in the short term. For starters, the United States, even in the absence of a deal, probably won't default on its debt. And, even in the off-chance that it does temporarily, China would probably continue to buy U.S. Treasuries anyway. According to Peter Morici, an economist at the University of Maryland, without better investment options available in the global market, the Chinese will still need to buy U.S. dollars and bonds in order to keep the value of their own currency low. "This is part of China's game to beat us economically," he says. "But in terms of changing the substance of the relationship? No. It's all theatrics."
Also, since China owns more than $1.1 trillion in U.S. debt, the country's officials won't want to risk doing anything to publicly undermine the value of its holdings. For example, while it issued a statement on the debt ceiling fight, China's official stance was tame. "We hope that the U.S. government adopts responsible policies and measures to guarantee the interests of investors," Hong Lei, a Foreign Ministry spokesman, said Thursday. [See a slide show of 6 consequences if the debt ceiling is not raised.]
Still, Kirk says that as China begins to diversify its own economy and become less dependent on exports, the economic relationship between the two nations will be different. "Their appetite for U.S. securities is declining," he says.
So, does it matter now what China thinks about American politics? Maybe not. What does matter is that Congress and President Obama find a solution for the debt crisis soon. "In the long run, this diminishes the stature of the United States of America," Morici says. "China doesn't have to do anything to do that."