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Home / Business / China's nuclear option to reduce US debt would fail

China's nuclear option to reduce US debt would fail



Investors are increasingly concerned about how China will retaliate against US tariffs when it no longer has goods to impose levies on. China has many levers, including the collapse of its currency, the blockade of exporting rare earth minerals, or even orchestrating boycotts on iPhones and other American goods.

The outbreak of tensions in recent weeks has also led to speculation China could reduce its holdings of US debt. The state media in China, the largest holder of US government bonds, intensified this speculation.

The close-knit Twitter account of Hu Xijin, the editor-in-chief of the Chinese Global Times, earlier this month claimed that "many" Chinese scientists are discussing the "possibility of depositing US government bonds."

However, Beijing is unlikely to arm its huge holdings of American debt, as such a dramatic move would likely backfire, perhaps even badly. This would destroy China's own financial resources, diminish confidence in the country as a responsible actor, and frighten global markets. And it's not even clear that dumping government bonds would have the desired impact on the US.

"China will not do that, it's a pointless exercise," said Barry Bannister, head of strategy for institutional stocks at Stifel.

Such a fire sale would aim to affect the value of US government bonds, which would increase yields. That would be a big deal, since the 1

0-year interest rate serves as a benchmark for other forms of credit. The cost of credit for everything from car loans and mortgages to corporate debt would rise.

"It's more possible now than at any time in recent history," said Guy LeBas, chief strategist for fixed income securities at Janney Capital Management.

How It Backfells

Analysts are reluctant, however, I do not think that China would actually drop some government bonds, because it would be tantamount to kicking themselves in the foot. A fire sale would cause your own stocks to lose value.

LeBas called it the strategy "Rip your nose off".

"The last thing they want is to compromise the value of their remaining assets," said Michael Hirson, the former US Treasury Secretary in China.

  Why The Debt Relief Of Corporate America Is Significant

Hirson, currently head of Chinese practice at the Eurasia Group, said this would reduce the amount of Beijing's foreign exchange reserves on the means to defend its currency and to maintain financial stability.

China also has limited alternatives to deal with all its surplus cash.

Converting the money into Japanese and German debt is not ideal. The 10-year bonds of both nations are currently associated with a negative yield, while the yield on US government bonds at 2.2%, although shrinking, but still positive. The interest rate on German 10-year bonds fell to a record low on Friday.

And holding on to cash could cause China's own currency to gain too much, which tends to be deflationary.

"If China deflates, credit problems with its banks will get worse, which is the last thing they need," Bannister said.

Another problem with dumping Chinese government bonds is that global financial markets could be destabilized at a time when they are already nervous. Financial turbulence could affect the real economy and worsen the continued slowdown in China's trading partners.

"If you wage a trade war with the US, you want a stable economic environment for the rest of your exports," Hirson said.

Would it work at all?

It is not even clear that China would be able to trigger a panic on the US financial market.

China sold $ 600 billion worth of US Treasury bonds between mid-2014 and late 2016, yet yields fell, according to Stifels Bannister.

US debt is among the safest assets in the world. Especially during the recent market turmoil there is strong demand from other foreign buyers, large life insurance companies, pension funds and big banks.

This demand would only increase if China deterred investors by dumping US Treasury bonds. In sinister times, cash usually floods into US debt.

"In a destabilized world, there seems to be a mature US Treasury market in the name of escaping to safety," said Bannister. Wall Street assumes that the president will not let the stock collapse. "class =" media__image "src =" http://cdn.cnn.com/cnnnext/dam/assets/190529162414-nyse-file-large-169.jpg "/>

[19659017] A modest rise in US Treasury yields may prove temporary, with higher yields likely to only attract buyers to re-enter, leading to lower interest rates. "

" China Dumping Treasuries could panic global markets without "It would hurt China's reputation as a source of stability and accountability."

Instead of dumping government bonds, analysts would try to retaliate China in some other way.

For example, it is becoming increasingly prevalent speculates that Beijing will restrict the export of rare earth minerals that are crucial to the technology and defense industries, and on Friday the Chinese Ministry of Commerce announced plans to launch a sch wartes list of foreign companies that violate market rules. This is a likely reaction to the US export ban on Huawei.

"If the goal is to affect US financial markets," LeBas said. "Selling Treasuries is not the way to go."


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