What Impact Would a U.S. Debt Default Have on China?

The big political drama in Washington in the next few months will be the fight over the federal debt ceiling. The worst-case scenario is that Congress refuses to raise the ceiling and the U.S. Treasury defaults on its debt. Since U.S. treasury debt powers the entire world financial system, the result could be a massive global economic crisis. If that happens, how well would the world’s second-biggest economy, China, survive the crash? And would a U.S. default give China an opening to create a new global financial system less dependent on the dollar?

The good news is a U.S. default is improbable. Most likely, Congress will reach a deal under which the debt ceiling is raised now in exchange for promises of federal spending cuts later. This is what the “Tea Party” Congress did in 2011, and the outcome that Senate Minority Leader Mitch McConnell has forecast.

If negotiations fail, the Biden Administration still has plenty of options to prevent a default, ranging from accounting tricks to a decision to ignore the debt ceiling altogether, on the ground that it violates the Constitution’s requirement for timely repayment of all federal debts.

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