The ongoing tit-for-tat tariff exchange between China and the US could push Beijing to strike back with the so-called ‘nuclear option’ – dumping its vast holdings of US Treasury bonds.
While the move would be partly self-defeating for China, it would also have devastating consequences for global financial markets, Sourabh Gupta, a senior fellow at the Institute for China-America Studies in Washington told RT.
“In that case, there would be absolute chaos in global currency markets, and thereafter in global equity markets,” he said, adding that with regards to interest rates “after significant initial volatility, the effects would be somewhat muted.” The concern though is with financial market sentiment, not specifically interest rates, Gupta said.
China currently owns $1.13 trillion in US Treasuries. That’s a fraction of the total $22 trillion in US debt outstanding but 17.7 percent of the various securities held by foreign governments, according to data from the Treasury and the Securities Industry and Financial Markets Association. Beijing has been pulling back from its role in the US bond market, having cut holdings nearly four percent over the past 12 months, but it still takes the top spot among America’s foreign creditors.
Gupta said that even if the trade conflict worsens abysmally, he doesn’t think Beijing will completely stop buying US debt. “There are better avenues for retaliation, such as government-juiced consumer boycotts of US goods. Until China fully internationalizes and hardens its currency, it simply cannot walk away from US debt markets… and doing so would be self-damaging,” he said.
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Meanwhile, William L. Anderson, a professor from the College of Business at Frostburg State University believes that “if the anti-Chinese rhetoric from the White House continues, then the Chinese would purchase less US debt, at least in the short run.”
He told RT that American consumers would certainly feel the pinch, noting: “We also have seen a serious crash in the US stock market in large part because of this unnecessary and destructive trade war that has its roots in the Donald Trump administration.”
According to Gupta, foreign purchasers of US debt, including China notably, are important players in the market at a time when “US debt as a percentage of GDP is gradually creeping towards triple digits.”
If China partially exits the US bond market, Washington will have to find new buyers for its debt. That will require higher interest rates, which in turn will have negative implications for the US economy, said Gupta, adding however that “one must also maintain perspective.”
He explained that US Treasury markets are deep and liquid, and China’s exit, at a time when interest rates are already near decades-long lows, will only cause a modest spike in rates. “As the primary reserve currency issuer in the international monetary system, the US government will be able to finance its medium-term borrowing needs without significantly hurting the domestic economy. But it would certainly not be painless.”