Research On The Sustainability Of U.S. Public Debt And Its Implications For Chinese Economy And Finance

In the summer of2010, the U.S. debt ceiling dispute attracted the attention of the world, and financial markets were shocked when Standard&Poor’s finally cut the U.S. AAA rating. But with the increase of the debt ceiling as well as the European sovereign debt crisis intensified, the U.S. national debt problem was temporarily covered up. It must be noted, however, that the U.S. national debt has ballooned to the highest level since World War II, the ratio of national debt to GDP has reached to nearly100%, coupled with the long-term U.S. fiscal deficit and the continuing economic stimulus policies, its debt levels will continue to expand, we must pay our sustained attention to the U.S. debt problem. Today, global economy is highly integrated, other countries will inevitably be affected when a nation’s sovereign debt crisis outbreak. And due to the special status of the United States in the global economy, the impact on global financial markets is immeasurable if U.S. Treasury bonds default. Therefore, the sustainability of U.S. Treasuries not only affects the credibility of the United States and its economic development, but also affects the stability and development of the global economy. China, as the largest overseas holder of U.S. Treasuries, has invested most of its foreign exchange reserves in U.S. Treasuries. The sustainability of U.S. Treasuries not only affects the security of our foreign exchange reserve assets, but also affects our financial and economic fields. Consequently, it’s of great theoretical and practical significance to research on the sustainability of U.S. Treasuries, its impact on our economy and the countermeasures to be taken.This paper relies on the Intertemporal Budget Constraint model to study the sustainability of the U.S. public debt, and for better use of it, this paper added unemployment rate to the test condition of the model since unemployment rate is one of the twin goals of the Federal Reserve, but previous studies did not pay enough attention to it. At the meantime, in order to verify the validity and stability of the model after adding the unemployment rate, we examined the model by applying the European heavily indebted nations in this model, and the results conform to reality. The research on the U.S. public debt shows that the U.S. public debt is sustainable, and will not default for the time being, but its sustainability faces great challenge in future. The default risk of U.S. public debt will increase sharply if the United States does not change the current monetary policy and fiscal policy. Of course, the United States will try its best to avoid this from happening because it is unacceptable for U.S. to lose its superpower status in the world economy. And on the basis of this situation, we predicted the measures that may be take to avoid default and to reduce its debt.The sustainability of U.S. Treasuries and the measures that may be taken will certainly have an impact on Chinese economy since China is the largest holder of U.S. debt. This paper analysis the influence from six areas, they are foreign exchange reserve, exchange rate and capital flow, inflation, monetary policy and foreign trade. Through analysis, we found that the measures will lead to a decline in the value and the purchasing power of our foreign currency reserve assets, affect the autonomy of our exchange rate fluctuations. promote the appreciation of the RMB and increase the press of inflation, influence the independence of our monetary policy, affect our trade growth and disrupt the normal process of China’s economy, and also restrict our policy options.Therefore, some measures should be undertaken to deal with the risks. We should transform the economic development pattern and restructure the economic structure. It can be promoted that our foreign exchange reserves investment and foreign exchange reserves portfolio diversity. It can be increased that the limit of foreign exchange reserves holding by individual and enterprise. And we can improve and perfect RMB exchange rate formation mechanism, promote the reform of the international monetary system and speed up the internationalization of the RMB. And US treasuries that we hold can be kindly used as counter to protect our interests and enhance our international influence.