China uses $1.1 trillion in US bonds as a weapon of retaliation?
The trade war between Beijing and Washington has raised concerns in global financial markets that China could use its more than $1.1 trillion in US government bonds as a weapon to retaliate against the US administration.
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| Scene of goods export in Lianyungang, Jiangsu province, China. Photo: Reuters |
About a decade ago, China surpassed Japan to become the largest foreign holder of US government debt, according to Reuters.
According to the US Treasury Department, as of March, China held $1.12 trillion in US government bonds. Japan ranked second with $1.08 trillion.
China’s holdings of US Treasuries peaked in 2013 at nearly $1.32 trillion and have since fallen 15%. The March level was the lowest in two years.
China, in percentage terms, owns 7% of the $16.18 trillion U.S. public debt, the lowest level in 14 years. The largest creditor to the U.S. government is the Federal Reserve, which owns $2.15 trillion of U.S. government debt.
As an exporter to the US and world markets, China has the world's largest foreign exchange reserves, worth more than $3 trillion, most of it in US dollars.
Since the 2007-2009 financial crisis, the US Treasury has consistently outsold bonds issued by other developed economies such as Japan and Germany.
What happens if China sells off?
Most analysts agree that a large-scale Chinese sale of US bonds would disrupt the US government bond market and other markets.
This, if it happened suddenly, would immediately depress the price of US government bonds and raise interest rates. Simply put, the cost of borrowing for the US government would rise rapidly. And because bond yields are the “benchmark” for consumers and businesses, interest rates on everything from corporate bonds to mortgages would rise, slowing the economy. This, in turn, would reduce investor confidence in the US dollar.
But most analysts say China would not choose to dump its holdings of U.S. government bonds because that would cause prices to plummet and damage its own assets. This would, as the Chinese say, be “like shooting yourself in the foot.”
Moreover, the renminbi is not a fully floating currency. Beijing uses its US Treasury holdings as a tool to keep the currency under control, especially relative to the US dollar itself.
Some analysts also believe that China uses its reserves of US bonds and other foreign currencies to hold down the value of the yuan, making its exports more attractive in price.And the US is China's main export market. If this market sneezes, Chinese people across the ocean will immediately feel the cold air.
