Earlier today, China’s vice finance minister dismisses talk of selling US Treasuries in response to tariffs.
China is the largest foreign holder of U.S. debt, which is rapidly mounting amid massive government stimulus programs. Beijing holds $1.17 trillion in Treasury bonds, according to official stats, helping to finance the growing budget deficit. If it were to halt its bond purchases, government interest rates could potentially skyrocket, as well as force borrowing rates up for consumers and companies.
Speculation over the Chinese-owned debt has abounded thanks to some mixed messages. On Tuesday night, Chinese ambassador to the U.S. Cui Tiankai responded to a question on Treasury bond purchases simply by saying that, “If the other side makes a wrong choice, we have no alternative but to fight back.”
But the vice finance minister’s words would appear to put that speculation to rest. “Both in domestic and international law, China is a responsible investor,” Zhu said. “So that’s what Premier Li Keqiang said, the real policy of (the) Chinese government to the U.S. Treasury investment.”
Official Denial
Some might reason, never believe anything until it’s been officially denied. Others wonder, what if?
O.K. So, What If?
Imagine the devaluation of the Yuan if they did it 🙄👇 https://t.co/PmAPRBClYF
— Daniel Lacalle (@dlacalle_IA) April 4, 2018
I am unconvinced. If China sold treasuries, what precisely would it buy?
Recall that China help stop currency flight by selling US treasuries to support the yuan.
In response the yuan rose. Actually, the US may welcome China dumping treasuries!
Meanwhile, Trump’s tariff policies and the Chinese response are not good for either US or Chinese consumers.
Such is the nature of silly trade wars.
Mike “Mish” Shedlock
Nobody buys from China using YUAN. Their enterprise sold their goods to US, collect USD, then trade their USD, forced by their law, to get YUAN from the government. That is how their government collects most of their foreign reserve. If their government does not use their USD to buy US debt but anything else, they will just inflate the price of the assets they purchase, the sellers of these assets will eventually buy US debts to circulate these USD. If in fact the chinese government just stack USD cash in their warehouses, it will basically dry up USD cash supply and drive up US debt interest rate. But then they would have a huge pile of US dollar bills that is useless to them.
You are not supposed to act on this blog as if everything is normal. Try a little bit harder to think about the upcoming doomsday.
Does anyone think that Chinas holding 5 percent of US debt, would really cause so much upheaval here? US Debt held by China has not gone up in several years. And That debt Adjusted for inflation is worth less than it was a few years ago. Meanwhile we have financed our deficits without any increased help from them for years. Over time there threat of dumping our debt is becoming less important. With a little short term pain we could absorb the small amount of debt they hold. There dumping our debt would increase the prices of there exports. While triggering a larger trade war. Our exports to them are a small amount of our total exports, and a really small amount of our total economy. There exports here are 20 percent of there total exports. Who on the world would step in to absorb there exports? Overall they are the ones that have much more to lose. There are many countries that can now export at lower prices than China. If we replace China’s exports with lower cost exports, they have lost exports that will never come back. If they stop buying our exports we would have some dire short term pain to a few areas of economy. But much of that would quickly be negated by our changing trading partners. For instance, there is not a huge surplus of soybeans in the world. China could stop buying our soybeans, but there would soon be a shortage of them in the rest of the world. Requiring someone else in the world to buy ours. If we stopped trading with them. Over the long term, China would lose much more than we would. The amount of debt ridden bankrupt companies in China is so great. It would not take much to tank there stock market and there economy.
*Kidhorn said: “They then buy US debt because they need to recycle the USD back to the US in order for their sterilization process to work. If China sold their US debt holdings, the end result would be the Yuan appreciating vs the USD. Which would help our trade imbalance.”*
Or, to keep the Yuan from appreciating they could sell Yuan to buy something other than US debt. If the price of the Yuan started to fall too much vs. the dollar, they could start selling their already substantial hoard of US debt to control the slide of the Yuan.
link to stlouisfed.org
What would they buy with the trade surplus? How much is their US stock portfolio worth?
China doesn’t have to accumulate USD because of their trade surplus. People who buy from China pay in Yuan. Not USD. It’s not like they have a huge stack of 100 dollar bills piling up. They buy USD in Forex in order to prop up the USD vs the Yuan. They then buy US debt because they need to recycle the USD back to the US in order for their sterilization process to work. They couldn’t care less about the interest they receive or losing money on their purchases. If China sold their US debt holdings, the end result would be the Yuan appreciating vs the USD. Which would help our trade imbalance.
“All central banks use straw buyers” ? Come on, we would be talking about $2 trillion or so in Treasuries being held by an anonymous “straw” buyer. Not likely.
all central banks use straw buyers/proxies to hide what they’re doin
I agree. Since 2011 I think they have been purchasing real property and assets with their dollar surplus instead of continuing to accumulate US Treasuries, and that has helped feed US deficit spending into higher asset prices. It is a silly notion that China must accumulate US paper IOU’s forever because of their trade surplus.
China has to buy something, to the extent they have a surplus. What could they buy? They could buy bonds, stocks, real estate, companies, or, they can buy their own currency, making it rise, and the USD fall, which they don’t want.
I would think China would be worse off in a trade war since they export to US 4X what they import from the US. China’s exports to the US are a FAR higher % of their GDP, then the US exports to China are a % of their GDP. If China couldn’t run a large trade surplus to the US could they continue their massive infrastructure expansion?
Mish, not necessarily. Looking at the history of China’s holdings, they owned over $1.3 trillion in the middle of 2011. Today, they own less than $1.2 trillion, even though we have been running substantial trade deficits over that time. In fact, since 2011, their holdings have been relatively flat. They must be trading into something else, but they have not been accumulating treasuries for quite a while.
China is a guaranteed buyer to the extent of the trade deficit!
It has been decaying since 2008. Used to be in pretty good shape.
link to bea.gov
Really we should be looking at the net position, not just the liabilty side:
China may not dump their US Treasury holdings, but they may not be big buyers going forward and that would still be a problem for the US, as we need buyers for upwards of $2 trillion annually (new issuance plus rollovers). But in any event, its a mess. As a result of today’s trade tariffs, US consumers will be paying more for $50 billion in Chinese imports while the cost of $50 billion in exports from US companies and farmers just rose sharply. Same for China. So who is going to be better off? And then the market rallied on this news? Go figure.
China would have to sell the Treasury bonds to someone. Who? The Belgians? And if the Chinese sold bonds and made it more difficult for the worthless US Political Class to borrow money internationally, that could be a great thing for the US economy in the longer term.
China complaining about the Fed printing money is like the pot calling the kettle black. They are just as bad. If they dump treasuries they will lose money on the principle because the yield would go up. Also that would strengthen their currency which would hurt their export competitiveness. Its idle rhetoric.
The damage seems to be subtle, slow moving, but lasting. China started complaining about FED printing right from the start, but got dismissed by Bernanke. Ever since, it devised ways to invest in real assets around the globe. Not likely that this trend will change course.
Is that reference to this – link to youtube.com ?
One of “What if”. Assuming China does “man up” and really does something that illogical and decides to dump treasuries. Is there anything prevening Trump from imposing “tariffs” on US treasuries that are dumped by foreigners? Just questioning if “tariffs” could be applied not only to trade imports, but also on capital inflows.
China is a threat to Western Civilization. No Western Civ country should have ANY trade with them.
Bueller, anyone, anyone..anyone…