China is ready to sell off trillions of US treasury bonds?
Tensions between the US and China are escalating, raising fears Beijing could sell off all US government bonds in an emergency.
|Money US dollar denomination 100. Artwork: AFP / TTXVN|
The trade confrontation between the US and China has spread to a new front, the war over technology.
While Washington is blocking the use of equipment by Chinese firms on suspicions of a threat to national security, Beijing reminds the United States of its main “weapon”, the ability to sell off fruits. US treasury bills worth trillions of dollars to reduce the exchange rate and shock the stock market.
This is an extremely dangerous scenario for the entire world economy. So the question is, how far is Beijing ready to go? Here is the Sputnik analysis of this content:
Trade and technology war
In January 2020, the world’s two largest economies took an important step to end the trade war; It is the signing of a first-stage agreement to gradually restore bilateral trade relations.
However, the COVID-19 pandemic wiped out everything. Washington accused Beijing of the pandemic and “demanded” China write off its debt to compensate for the damage caused by COVID-19. In addition, the US also announced to withdraw from the World Health Organization (WHO) because that organization “leaning” according to China.
Washington-Beijing tensions were increasingly complicated before the US presidential election. Mr. Donald Trump was once again reminded of the economic damage Chinese companies have inflicted on the US economy. He accused the companies of this country of stealing the jobs and intellectual property of his homeland.
In August, Washington accused Beijing of interfering with the election campaign via the Internet and social media. The US has hit on China’s TikTok app, arguing that TikTok must be banned, otherwise Beijing will be able to access US citizens’ data.
Meanwhile, the owner of TikTok, a Chinese company ByteDance, was also forced to sell TikTok’s operations in the US. This must be done by November 12. Otherwise, President Trump threatens the TikTok service to be completely blocked in the US.
It is not yet clear how Beijing will respond, but experts say that the Chinese government has no specific motives to defend TikTok.
On the more serious side, Beijing seems to be reminding the United States that China has more serious leverage. That is the amount of US government bonds worth more than $ 1 trillion.
Because of the trade war with the US, China has begun to gradually withdraw the amount of bonds it owns in the US Treasury. From the peak of $ 1,320 billion in November 2014, China has sold 20% of the value of the US government bonds that it is holding, equivalent to more than $ 200 billion.
As a result, in June 2019, China ranked second in terms of the amount of money invested in US treasury bonds, and now Japan is leading the list of America’s largest creditors with $ 1,120 billion.
According to the most recent report of the US Department of Finance, in mid-September 2020, China’s investment portfolio fell to 1,080 billion USD. Thus, only in the first half of 2020, China has liquidated $ 106 billion of US bonds, the fastest selling rate since 2015.
However, economic confrontation is not the only cause. One of the reasons that China continues to reduce the amount of US treasury bonds is the risk of the dollar depreciation because the US money printers are continuing to operate “tirelessly”.
Meanwhile, the US public debt is still on the rise. In the period January-August 2020, the US issued 7,700 billion treasury bonds. This is a record number. That means the economy is supported only by loans.
Beijing sees clearly that Washington cannot solve its economic problems without the help of money printers, so investing in US national debt is extremely risky, China’s Global Times reported. Italy.
The risk of a big sell-off?
Tensions between the US and China are escalating, raising fears that the second largest foreign creditors of the United States may no longer bear it and selling off all US government bonds in an emergency.
The consequences of such a move would be devastating. The massive dumping of these securities will cause panic in the market.
However, this step is at a disadvantage for China itself. First, the short-term sell-off of 100-200 billion USD bonds will undoubtedly lower their prices. In this case, the value of China’s own assets and reserves will decrease significantly, and the proceeds from the sale of the securities also plummet.
In addition, the dollar will collapse, and this will not serve China’s interests because a weak greenback will make Chinese exports more expensive.
Furthermore, the dumping of US treasury bonds will severely limit Beijing’s ability to control the yuan, if the trade war goes “out of control.” Ultimately, the money received from the sale of US Treasury bonds must be invested somewhere, which is not easy.
Meanwhile, not only will China face problems, other countries will also suffer heavy consequences. Michael Ross-Johnson, CEO of Chatex Bank – a cryptocurrency exchange and storage service – commented that “taking down the ‘pyramid’ of US bonds means pushing the world into financial chaos. It is much worse than the crises of 1998 or 2008. So something like this is unlikely to happen in the near future.
Most likely, the process of giving up the dollar and US Treasury bonds will be conducted in stages – which is happening over the years. According to the leading economist in China, Professor Xi Junyang from Shanghai University of Finance and Economics, China will gradually reduce the US debt holdings to about 800 billion USD in normal condition.
Of course, of course, China can sell all of its US bonds in extreme cases like military conflict.