The D.C. dysfunction puts China in a difficult place. Any financial markets turmoil that occurs because of a failure of Congress to do its job could harm China’s economy, and especially its exports. The accumulation of massive foreign-exchange reserves, now at record levels, is a feature not a bug of China’s economic model, and in spite of increased talk of diversification China has few viable options beyond U.S. government securities for those massive reserves.
A default or debt crisis that hits U.S. Treasuries not only would reduce the value of China’s massive holdings of U.S. government securities but would also open the leadership to domestic criticism for having so much of China’s “hard-earned” money invested in the U.S. The heavily cited Xinhua piece calling for a “De-Americanized world” was written for the Xinhua English service and did not get huge play in domestic media. Between the huge holdings U.S. government assets and the large number of officials with financial and family ties to the U.S.A., excessive criticism of the D.C. dysfunction could be a double-edged sword.