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News analysis: What’s next for China?

The US government will be hoping the memories of its government shutdown fade fast but the incident has significantly shifted the balance of power between the nation and China, the world’s burgeoning superpower.

Earlier this month, the failure of politicians in Washington to agree a budget prompted the closure of non-essential government facilities for more than two weeks.

The stand-off only ended at the 11th hour on October 17, when a temporary extension of the debt ceiling was agreed in order to stave off imminent threats of the country’s first ever default.

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As well as costing it an estimated $24bn (£14.8bn), the debacle has embarrassed the US as it revealed the extent to which the Republican party was loathe to work with a Democrat president.

Friction was also most evident in the US’s relationship with China, which is the country’s largest creditor as it owns roughly 8 per cent of publicly held US debt.

“As the world’s largest economy, a debt default would not only affect the United States’ reputation, but also drag down the recovery process of the global economy,” China Ministry of Commerce spokesman Shen Danyang cautioned on the official government website.

The country went even further with its rhetoric when Chinese premier Li Keqiang (pictured above) told US secretary of state John Kerry at the Asian summit earlier this month that China had been paying “great attention to the US debt ceiling issue”.

“They are obviously very angry with the US,” Kathleen Brooks, research director at Forex.com said.

She noted that it was “precipitous timing” that the renminbi strengthened to a record high against the dollar during the shutdown, while there had also been recent signs of a liberalisation of Chinese assets which would help further internationalise the renminbi.

These included a currency swap line between the People’s Bank of China and the European Central Bank, and an agreement that British-backed financial institutions could invest up to £8.2bn in Chinese securities, which could help them reel in Chinese investment.

“China will have to look long and hard at what is going on in the US,” Ms Brooks said, to decide whether it still wanted to invest quite so much of its assets there, as the slowdown highlighted that it is a “country with political risk and high debt”.

Rather than diversifying into the euro or sterling, which have been beset by their own problems, the way to deal with this weakness is for the government to allow the Chinese currency to strengthen, the research director argued.

Qinwei Wang, China economist at Capital Economics, agreed that the problem is that Chinese foreign policy seeks to prevent the renminbi from strengthening, while its trade surplus means it needs to invest roughly $20bn each month. “Each month such a big amount of dollars has to be invested somewhere and only the US Treasury market is large enough to absorb that investment,” he said.