China and Japan are both worried about the current upcoming fight over the U.S. debt limit. According to the Independent:
The Chinese Vice Foreign Minister, Zhu Guangyao, told America's deadlocked politicians on Monday that "the clock is ticking" and called on them to approve an extension of the national borrowing limit before the federal government is projected to run out of cash on 17 October.
"We ask that the United States earnestly takes steps to resolve in a timely way the political issues around the debt ceiling and prevent a US debt default to ensure the safety of Chinese investments in the United States," Mr Zhu told reporters in Beijing. "This is the United States' responsibility," he added.
If the United States doesn't, what would happen?
- China might have to give up its mercantilist strategy of holding the yuan far below its market rate while keeping out American products in order to steal American industry.
- China might lose money on some of the loans that it made to the United States government as a byproduct of this mercantilist strategy.
Japan is also concerned. It is threatening to slow or stop its purchases of U.S. Securities. Financial Times reports:
On Tuesday Japan's finance minister Taro Aso called on "the United States to resolve its debt ceiling stand-off without delay."
The absolute value of US bonds held by the Japanese government could decline if the situation was not brought to a swift end, he added.
Over the last year, Japan has bought dollars and invested them in U.S. bonds in order to lower the exchange rate of the yen versus the dollar by about 25% (from 1.28 cents per yen on October 8, 2012 to 1.02 cents per yen on October 8, 2013). They wanted Japanese automobile and electronics companies to earn huge profits in their competition with American car companies and electronics companies. These Japanese companies will likely invest some of their increased profits in new products, which should enable them to gain market share in their competition with American companies.
If Japan and China stop buying dollars with their currencies to keep their currencies at an artificially low value, they may have to let their currencies rise in foreign exchange markets. They might even have to take down their trade barriers and let their people buy American products with the dollars that their exporters are earning from selling to the United States.
The falling dollar, relative to the yuan and yen, would make American products more competitive with Chinese and Japanese products in U.S. and world markets. The boom in U.S. net exports and business investment would likely bring the United States out of its current trade-deficit caused economic stagnation. The long-term U.S. interest rate would rise to a level that would encourage households to save and discourage the U.S. government from running massive budget deficits. We can't have that!
Additional disclosure: I currently am long on JEQ (Japanese Equity Fund) which is benefiting from Japan's mercantilism.