Jeff Cox at CNBC says China’s ‘self-destructive nuclear option’ in trade war: Selling US Treasury bonds.
China currently owns $1.13 trillion in Treasurys, a fraction of the total $22 trillion in U.S. debt outstanding but 17.7% of the various securities held by foreign governments, according to data from the Treasury and the Securities Industry and Financial Markets Association. Should the Chinese decide to walk away or reduce their role in the market, that, at least in theory, could create a substantial dislocation for a country such as the U.S. that relies so much on sovereign entities to buy its paper.
“It’s a self-destructive nuclear option,” said Robert Tipp, chief investment strategist and head of global bonds for PGIM Fixed Income. “Maybe it helps them as a bargaining chip, but it’s endangering the value of something they’re deeply involved in.”
“To me, that is the biggest worry. This is really the biggest weapon they have,” said Sung Won Sohn, professor of economics at Loyola Marymount University and president of SS Economics. “They need to do more to counter the United States. So if push comes to shove, that’s what they are going to resort to.”
Treasury yields actually moved lower during Monday’s stock market panic selling despite more chatter of a China bond market retaliation. A tweet from Hu Xijin, editor in chief of the state-run Global Times, noted that “Chinese scholars are discussing the possibility of dumping US Treasuries and how to do it specifically.”
Not Understanding Mathematical Reality
Tipp is on the right side of the argument, but he does not present a clear case why. The rest of the comments are nonsense.
The mathematical reality of the situation is that as long as China runs a trade surplus with the US, China "must" accumulate US assets, over the long haul. It is a mathematical certainty.
China has at times over the past couple of years sold treasuries. But that is not because China wanted to, but rather because China sold treasuries to buy yuan to shore up the yuan and stop capital flight.
For the most part, China does not want the yuan to rise. A cheap yuan helps Chinese exporters.
Buying US Assets
China does not have to buy treasuries. It could buy US equities, gold, or US businesses. But Trump would not let the latter happen.
Buying equities would put China at the mercy of a US stock market decline.
The safest, most liquid choice for China is to accumulate US treasuries with its trade surplus.
That is what China does and will continue to do. There is no realistic option of China dumping US treasuries.
Mike "Mish" Shedlock