US Treasury Secretary Janet Yellen speaks about the US-China economic relationship at Johns Hopkins University's School of Advanced International Studies in Washington, DC, on April 20, 2023. Photo: AFP

A possible US default, which may take place as early as June in what would be a first in the country's history, will severely damage already shattered US credit and financial system, while push more international investors to shift to other countries' assets, experts said.

US Treasury Secretary Janet Yellen told Congress on Monday that the US could default on its federal debt as early as June 1, if legislators do not raise or suspend the nation's borrowing limit and avert what could potentially become a global financial crisis, according to the Associated Press on Tuesday.

In a letter to House and Senate leaders, Yellen asked congressional leaders "to protect the full faith and credit of the US by acting as soon as possible" to address the $31.4 trillion limit on its legal borrowing authority, the report said.

Chinese experts said that a US default would be a "very irresponsible act" by the world's largest economy for its predictable impact on global financial stability.

The scale of the US deficit already reached the upper limit at the beginning of this year, and risk aversion by investors is rising, as shown by higher prices for so-called safe haven assets.

For example, in April, the price of gold almost reached a record high, and the gold price in China fluctuated around 440 yuan ($63.66) per gram.

While it's unclear when or how a debt default may happen, it serves as a reminder of the accumulated risks of the US financial system as the result of US' reckless monetary policy. It will spur the internationalization of the yuan as a more reliable and trustworthy currency in settlement among international investors, experts said.

With the rising "de-dollarization" trend in the world, many countries are hedging against the risk of a possible US default through cross-border payment settlement mechanisms and diversification of their reserve assets, Dong Dengxin, director of the Finance and Securities Institute of the Wuhan University of Science and Technology, told the Global Times on Wednesday, noting that the yuan stands out as a more reliable alternative.

Major economies including China have moved to cut their holdings of US Treasury bonds while others are using a diversity of currencies in trade settlements, Zhao Xijun, co-director of the Capital Market Research Institute at Renmin University of China, told the Global Times on Wednesday.

The Chinese mainland held around $859.4 billion in US government debt as of January, down by $7.7 billion since December, the sixth consecutive month of reductions. 

Other countries such as Brazil have put more weight on the yuan in trade settlement to curb growing risks related with the US dollar.

If the US government defaults on its debt, the nation's credit is to face a heavy blow, and investors will dump more US debt, which will intensify pressure on the country's financial system, experts said.

"Given this context, it's likely that the US Congress will approve a higher debt limit, allowing the government to borrow more to pay its bills," Dong said.

But when the US dollar hegemony starts to crumble amid developing economies' shift to other currencies for settlement to fend off the risks of the reckless US monetary policy, the US may find even harder to peddle its treasury bonds, the expert said.