Thursday, May 7, 2020

Will China Dump It's $1.1 Trillion US Treasury Securities Position?

U.S. news reports suggest that White House officials have already considered the idea of cancelling all or part of the US$1.1 trillion debt owed to China.

Karen Yeung of the South China Morning Post reports that this may be causing Chinese officials to consider selling the Treasury securities.

Yeung writes:
China may move to reduce its vast holdings of US Treasury securities in the coming months in response to a resurgence in trade tensions and a war of words between the world’s two largest economies over the origins and handling of the coronavirus outbreak, analysts said.
US news reports indicated that White House officials have debated several measures to offset the cost of the coronavirus outbreak, including cancelling some or all of the nearly US$1.1 trillion debt that the United States government owes China.
While analysts added that the US was highly unlikely to take the “nuclear option”, the mere fact that the idea has been discussed could well prompt Beijing to seek to insulate itself from the risk by reducing its US government debt holdings.
That, in turn, could spell trouble for the US government bond market at a time when Washington is significantly ramping up new issuance to pay for a series of programmes to combat the pandemic and the economic damage it is causing...
 China could trigger a crash in the US dollar and financial markets by flooding the market with US Treasuries for sale, which would push down US bond prices and cause yields to spike. But that would also ignite a global financial catastrophe, hurting China as well.
Instead, China could cut back or stop buying new US Treasury issues, which would gradually reduce its holdings of US government securities as old ones expire and are not replaced.
“In the coming months, [China could] halt its Treasury purchases to send a clear signal of its intentions,” said Iris Pang, Greater China chief economist at ING Bank. “If it decides to do that, it could make actual sales [of its other holdings] at a later date.”
The Trump Administration is playing with fire.

There are many anti-China advisers around Trump that feed his anti-China bias. With the U.S. about to issue trillions of dollars in additional Treasury securities debt, you would think the last thing Administration officials would want to do is say anything that would discourage China from buying even more debt.

But the anti-China comments and the threats, of canceling the Treasury debt China holds, continue.



  1. China can obviously sell the debt it owns, but (at least outside of the lockdown) there is a constant flood of dollars into China, and something has to be done with them - hence, China owning so much in Treasury bills and bonds. Those dollars still need to go somewhere - maybe gold?

  2. Yeung is mistaken: The 'pandemic' isn't causing any economic damage — the US federal, state, and local governments are, by following W.H.O. orders.

  3. China keeps buying dollars because it benefits key stakeholders there. The US also has key stakeholders who benefit from this situation. Outside of armed conflict, I see no reason for either side to significantly change that arrangement.