Why China’s US debt holdings Are Its ‘Nuclear Option’ In Trump’s Trade War
Perhaps it’s considered China’s nuclear option fo the trade war within the US; The potential to begin dumping massive piles of Treasury Bonds which could, in turn, trigger a huge surge in the current interest rates and thus substantially damage the economy of America as we know it.
As the sides engage in this tit-for-tat exchange of tariffs, the potential that china could raise the stakes and end their contribution to the worlds largest consumer of US debt has again reared its ugly head.
Currently, China owns $1.13 trillion in Treasury. This is a fraction of the total of the $22 trillion of the US debt that is currently counted as outstanding.
And, according to the data from the Treasury and Securities Industry as well as the Financial Assoc., 17.7 percent of the various securities that are also held by foreign governments. Should the Chinese decide that ti’s time to walk away or to reduce the role that they play in the market, a huge dislocation of the sovereign entities may determine that it’s time to buy the paper.
For the moment, the market isn’t too concerned that China would take such a drastic step. This is due, in large part to the fact that the move wouldn’t have a huge impact except to create more dramatic headlines at this point in time.
It would be a self-destructive option. Robert Tipp, the chief investment strategist as well as the person in charge of Global Bonds for PGIM Fixed Income, views it as a potential bargaining chip. However, it’s potential for endangering the value of their involvement.
In fact, such a move could actually boomerang and wind up helping the US in the long run.
To start with, Chinese Reduction of the treasuries could actually weaken the dollar and make it more competitive than other markets. Treasury yields could also rise and then, prices may fall. This would lower their value in the portfolios for China.
Of course, another question is raised, “Where would China then put its money”? After all, all of that money would have to go someplace, and the bonds for the US are noted for being among the highest-yielding bonds in the world in comparison to the rest of the world.
It appears that the Treasury is the ideal place for security. In the quest for quality and capital appreciation, having that money to move around may be challenging, however, as Nick Maroutsos, co-head of global bonds for the Janus Henderson states, “It’s entirely possible that this could happen over the next six to 12 months”. However, calling it and making it happen are two entirely different statements.
Truth be known, this is the biggest weapon in their arsenal. China has already pulled back the role that they play in the US market. Their holdings have fallen by as much as 4 percent over the last 12 months. As a foreign government, the ownership of the Treasuries has increased by as much as 2.6 percent.
Following all of the disputes that are ongoing in the Trump administration, To further complicate things, Russia has, for the most part, exited the Treasury market. Meanwhile, Japan is the number 2 placeholder of US debt and has gone on to increase its holdings slightly in just the last 12 months of time to $1.07 trillion. Brazil has gone on to step into the number 3 position at $308 billion due to the 12 percent boost in that same time period.
As the US stares down the $1 trillion in deficits, the Chinese government does have some concerns.
That is one of the biggest concerns. It’s also their biggest weapon. So, if push should come to shove, that’s what they may resort to.
