How China Became a Wedge Issue Amid the US Debt Ceiling Nail-Biter

Against the backdrop of a looming debt default, the U.S. House in late April passed the Limit, Save, Grow Act of 2023, a Republican-led bill proposing to raise the country’s borrowing limit. The 217-215 party-line vote suggested the partisan nature of the bill, the purpose of which was to jump-start negotiations with President Joe Biden and his administration for deep cuts in government spending. The ongoing drama over raising the debt ceiling has become a recurring trend in U.S. domestic politics – but this time, China has been unexpectedly thrust into the spotlight.

Politicians from both sides have tried to make China a wedge issue to justify their own budget plans. The partisan debate over China’s role in the debt limit issue centers around three key points: prioritization of payment, government spending cuts, and energy supply chains.

Earlier this year, the Republicans put forward the Default Prevention Act, which focused solely on the domestic impact of the debt issue without any mention of China. However, the Democratic Party has since used the China issue to attack the Republican bill. The Biden administration’s Treasury Secretary Janet Yellen warned that the Republican proposal would prioritize China over other entities to be among the first to receive payments, calling it a “dangerous idea” that amounts to “default by another name.” Other prominent Democrats, including Representatives Richie Neal (D-MA) and Don Beyer (D-VA), criticized the bill as a “Pay China First” strategy that places China ahead of the U.S. military and economy.

In response to criticism from Democrats, the GOP revamped their previous budget plan and introduced the Limit, Save, Grow Act of 2023. This new proposal places a strong emphasis on countering China, particularly in achieving energy independence. Rather than focusing primarily on increasing the debt limit, the bill allocates a significant portion of its content to outlining measures to counter perceived threats from China. These include export controls, prohibitions on contributions from Chinese-owned entities, and restrictions on China’s attempts to acquire lands leased for oil or gas exploration.

The Republican Party’s insistence on cutting government spending stands in stark contrast to that of the Democrats, who have been pushing for increased spending. Dubbing spending as “extra weight,” House Speaker Kevin McCarthy (R-CA) labeled growing debt as a major source of the increasing U.S. dependence on China, which has consistently been one of the largest foreign holders of U.S. debt over the past two decades. In that respect, reducing government spending would result in fewer Treasury bonds being issued, ultimately leading to a drop in China’s holdings of outstanding U.S. federal debt.

In addition, McCarthy justified the GOP bill not only as a means of reducing U.S. dependence on China, but also as a way to curb inflation and protect Medicare and Social Security, implying that a robust U.S. economy needs to be built on China-U.S. decoupling. McCarthy’s argument was echoed by other Republican politicians, including Representatives Kevin Hern (R-OK) and Mark Alford (R-MO). They criticized the Biden administration’s debt ceiling demands as a gift to China, claiming that interest payments on the ballooning U.S. debt would be used for China’s military and economy, potentially undermining U.S. military superiority.

The debt limit bill has also become a battleground for energy supply chains, with Republicans emphasizing the need to enhance critical U.S. energy resources in the face of Biden’s “rush to green” policy. They argue that this policy, which outpaces U.S. domestic mineral supply chains, increases reliance on materials from China. To address this issue, Republicans aimed to repeal clean energy tax incentives under the Democrat-led Inflation Reduction Act through the debt limit bill.

Some GOP representatives even used human rights concerns to argue for the importance of stronger U.S. energy supply chains. For instance, during a hearing by the Committee on Energy and Commerce, Representative Bill Johnson (R-OH) lambasted the Chinese government for its treatment of the Uyghur Muslim community, which he claimed were forced into labor to support China’s supply chains, including China’s dominance of the solar panel industry. Johnson advocated for less reliance on China as a way to uphold human rights and protect U.S. interests.

The Democrats pushed back against the Republican characterization of their debt limit bill – again, repeatedly raising China issues to advance their argument. Senate Majority Leader Chuck Schumer (D-NY) defended the economic benefits brought by the Inflation Reduction Act, contending that GOP’s Limit, Save, Grow Act of 2023 would “send American jobs and critical battery manufacturing to China.” Representative Paul Tonko (D-NY) decried the Republicans’ lack of action to counter China’s lead in clean energy industries, contrasting it with the Democrats’ Infrastructure Investment and Jobs Act and Inflation Reduction Act, the provisions of which are nearly the antithesis of the GOP’s bill.

While Senator Joe Manchin (D-WV) expressed his intention to support the Republicans’ debt limit proposal, it is still most likely that the bill will be dead-on-arrival once advancing to the Democrat-controlled Senate. Nevertheless, with the 2024 presidential election approaching, both Democrats and Republicans want to avoid being held accountable for a potential debt default and a government shutdown. As a result, negotiations between the GOP and Biden are expected to occur, which may lead to the first-ever debt limit bill framed in anti-China narratives.

Despite speculation that China might be gloating over the U.S. debt drama, the country would actually prefer an anti-China debt limit bill to a full-blown default. A real U.S. default would bring more substantial harm than benefit to China. First, China’s holdings of over $800 billion in Treasury bonds would suffer tremendous depreciation, leading to a plunge in China’s foreign exchange reserves.

Second, economic turmoil resulting from a U.S. default would slash global demand for China’s exports, which are a crucial engine powering the country’s economic growth. China had a painful taste of export shock during the 2008 Global Financial Crisis – and the Chinese government cannot afford another massive, debt-financed economic stimulus program like the one it implemented 15 years ago. Currently, China’s own debt issue is no better than that of the United States.

Furthermore, notwithstanding speculation about China’s ambition to create an alternative to the U.S. dollar for the world’s default currency, it is nowhere near feasible. Not only has China failed to internationalize its currency, but its bond market is far less liquid and integrated with the rest of the world than U.S. Treasuries. If anything, China needs a robust U.S. economy to boost its trade as the latter provides the largest consumer markets for China’s exports.