On
21 June 2019, U.S. expanded its China blacklist to supercomputers and AMD
partners: 5 Chinese entities were added to the list, further restricting
China’s access to U.S. technology. As more and more “sanctions” are imposed by
Trump, it seems resolution is unlikely in the short term.
Analysts
say, China could strike back by dumping its vast holdings of U.S. government
debt. In fact, could dumping Treasuries really hurt the U.S. economy? In
today’s article, we will discuss the impact to both U.S. and China if China
dumps its Treasuries.
Impact
to the U.S. if China dumps its treasuries
Despite
slimming down its holdings in U.S. Treasuries in recent years, China is still
the biggest foreign creditor of U.S. (US$1.123 trillion), followed by Japan
(US$1.042 trillion). The amount, however, is only about 5% of the U.S. total
debt of US$22 trillion as of February.
By
dumping its holdings of U.S. treasuries, Treasury prices would be pushed down
and drive up their yields. This would raise the borrowing costs in the U.S.
(from consumers to the government), and slow down the country’s economic
growth.
Impact
to China if it dumps its treasuries
The
reason China accumulates US$ in foreign exchange reserves is to prevent the
Chinese currency’s excessive appreciation. As an export-driven country, mainly
to the U.S., China needs to maintain its RMB to be weak in order to ensure its exports
remain cheap. Therefore, when those reserves are sold off, it would strengthen RMB
against the US$, potentially.
Besides,
the value of China’s remaining Treasury holdings would be hurt as well by dumping
the treasuries.
“Dumping
treasuries would be an ineffective weapon for China as that would send yields
higher and hurt the positions of their own holdings in treasuries,” said Cliff
Tan from MUFG bank.
Thus,
many think that the Chinese government may only use the treasuries option as a
“weapon of last resort”.
Reference:
Will
China use its US$1.2 trillion of US debt as firepower to fight the trade war? Karen Yeung www.scmp.com
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