What If China Dumps Its US Treasuries?

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

Explainer: Will China dump U.S. bonds as a trade weapon? Not so fast, Richard Leong www.reuters.com