Alarm Bells and the U.S. Debt Crisis

　　The United States finally averted a debt default on October 17. If it happened， the U.S. credit rating would have likely beendown graded， with the financial market collapsing，dollar-denominated assets plunging，consumer credit crippled and bank credit exhausted.

　　China had bought U.S. government bonds worth $1.27 trillion at the end ofJuly. If the United States defaulted on itsdebt， China would undoubtedly suffer. ZhuGuangyao， China’s Vice Finance Minister，called for the U.S. Government to take credibles teps to ensure the safety of Chinese investments and the interest payments of government bonds should the default becomereality.

　　The U.S. debt problem is a lesson for China. First， China should diversify its holdings and disperse investment in financial products to avoid similar risk and danger.Of course， theore tically speaking， China canalso threaten to sell off its U.S. bonds， which would cause U.S. Treasury bonds to plummetand incur more losses for China.Hence， China needs to gradually rein inits holding of U.S. Treasury bonds by dispersingits investments， closing the trade surplusgap， restraining the rapid growth of foreignexchange reserves， hastening steps to openits capital account and reducing limitationson overseas investment by domestic residents.

　　Second， China’s local government debt is more worrying compared with the U.S.debt crisis. In June， the National Audit Office announced that 36 local governments oweddebt of 3.85 trillion yuan ($631.2 billion).Among them， 16 saw a debt ratio exceeding100 percent， with the highest hitting219 percent. In terms of urban construction investment bonds， the Yangtze River Deltaregion tops the list with an overall debt ratioof more than 200 percent.

　　Though the potential for a default by the U.S. Government is worrisome， the publichas knowledge of its origins and possible solutions.In contrast， China’s local governmentdebt is a mess and the specifics are few. If U.S.debt can be likened to a man pushed to theedge of a cliff and is aware of the distance tothe bottom， China’s local government debt isa man with his back to the cliff.

　　Third， government budgets shouldbe transparent and open to supervision.Superficially， bipartisanship is the culprit that has led to the shutting down of the U.S.Government. Yet， it was all due to a budgetfrom one wing of the U.S. Congress thatmust receive approval from another. This ensuresthat the government can’t issue bondsof its own will， nor will it dare waste public money.

　　Why is it that China’s local government sextravagantly spend taxpayers’ money onvanity projects？ Local people’s congressesfail to play a supervisory role in keeping governmentbudgets in check. Only when theyact much like the U.S. Congress does in super visingthe White House could taxpayers’money be spent in an efficient way.