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Beijing may strengthen stock market circuit breakers
Publication Date : 12-10-2013
What is China, the United States' biggest creditor, doing as the threat of a US debt default looms on the horizon?
Nothing publicly, but it is likely strengthening the circuit breakers in its stock markets and closely watching its interbank lending and yuan exchange rates.
China will not be hit hard from the default itself due to its closed capital markets, observers say, but will be affected by global volatility and the knock-on effects from the fallout in other economies.
Despite its holdings of a staggering US$1.28 trillion in US Treasury bonds as of July, held mostly by the government, China has so far been quiet on the policy front.
China's Vice-Finance Minister Zhu Guangyao has called on the US to ensure the safety of Chinese investments, but no concrete action has been taken publicly.
Experts say this could be because any losses to China would be only on paper.
China does not transparently adjust its holdings for fluctuations in market prices, and can buy and hold, so what really matters is repayment and not market prices, Reuters columnist John Foley wrote this week.
Alaistair Chan, a Sydney- based economist at Moody's Analytics, noted that most of the holdings of commercial banks in China are backed by its yuan currency, insulating it from a US debt default.
Still, Beijing is likely taking measures behind the scenes to prepare for the chaos on the larger global economy should it happen.
Said UOB economist Suan Teck Kin: "While there is no direct impact on its markets, (China) wouldn't want the indirect impact to affect the market unnecessarily in a knee-jerk, irrational fashion."
Thus, China could be working to minimise the fallout in the financial markets by strengthening circuit breakers in its stock markets so they trigger more easily, added Suan.
Stocks on the mainland can move up or down by only 10 per cent daily.
China may also be ensuring that the interbank market is well funded to avoid a repeat of the severe liquidity crunch in June that caused rates to spike, he said.
If markets get jittery and put the yuan under pressure, the People's Bank of China (PBoC), China's central bank, can intervene to maintain the currency's stability, said Chan.
Observers say a long-term solution would be for China to continue diversifying its holdings away from US government debt and press for the internationalisation of the yuan, something that it is already doing.
DBS Bank economist Nathan Chow said the PBoC has signed about 2 trillion yuan (US$326.7 billion) in swap lines with more than 20 foreign central banks since 2008.
"These swap lines... support Beijing's reserves diversification objective by swapping the yuan into foreign currencies, which can then be invested in foreign sovereign bonds," he added.