Sino-US ties in times of fiscal cliff

The recent mini-deal to help the United States avoid the fiscal cliff is just another timeout. In the next few weeks, a highly divisive showdown is likely to take place in Washington.

Only 6 percent of the 234 Republicans in the US House of Representatives are from congressional districts where Barack Obama won in the last presidential election. Also, Obama won only one of the 13 states - just 7 percent - where 14 Republican senators will seek re-election in 2014.

In his second term, President Obama hopes to work on his legacy, whereas congressional Republicans have fewer incentives for compromise since they must worry about their re-election.

Nonetheless, in the next four to eight weeks, the president, the House and the Senate must agree on a compromise over a new debt ceiling, a deficit-cutting plan, the Bush tax cuts, automatic spending cuts, unemployment benefits, payroll tax cut, capital gains and dividend taxes. The outcome of such an agreement (or the lack of it) has vital implications for the world economy, especially China-US relations.

At the end of 2012, US debt exceeded the $16.4-trillion ceiling, which led Standard &Poor's to repeat its warning that America could face another downgrade by 2014 or earlier. The debt burden translates to more than $52,000 per American citizen (about $15,000 more than in Greece). Only a credible, long-term fiscal adjustment program can ease this burden.

Like in summer 2011, the US Treasury Department is using "extraordinary measures" to borrow $200 billion, which gives legislators two months' time to raise the official limit. As the US' largest foreign creditor, China owns about $1.1 trillion of US Treasury debt. China's foreign exchange reserves total $3.3 trillion, or more than 40 percent of its GDP, with 65-70 percent of these reserves in US dollars.

Therefore, any prolonged friction over the US debt ceiling is likely to fuel a debate among Chinese and foreign creditors over the prospects of America's economy and creditworthiness, the dollar and the need to gradually diversify away from holdings in the US.