China Won’t Dump U.S. Debt Market
Renewed fears of a possible U.S. Debt selloff by China shook the market after Beijing-based Global Times tabloid newspaper under the auspices of the Chinese Communist Party published an article last Thursday quoting Xi Junyang, a professor at the Shanghai University of Finance and Economics, that was saying that “China will gradually decrease its holdings of U.S. debt to about $800 billion under normal circumstances”.
Xi Junyang has not provided any timeframe of such possible selloff. But, he added that “China might sell all of its U.S. bonds in an extreme case, like a military conflict.”
China is the second largest holders of U.S. Treasuries outside the United States with $1,074 billion stake in June down from $1.083 trillion the previous month, according to latest official data. It is true that China continuously lowering its U.S. debt holdings amid U.S.-Sino tensions. The White House Administration is mounting pressure on China on various issues, including accusations of conscious concealment of coronavirus real threat, human rights violations of Uighurs, undermining unique freedoms and status of Hong Kong, stealing technologies from the United States and many others. But if to look on the real figures, Chinese stake in U.S. Debt has decreased by only $38.1 billion from June 2019, from the level of $1,112.5 billion. China may not even necessarily sold this entire amount of Treasuries as it may have used other custodians to purchase Treasuries.
Nevertheless, with such pace of selling U.S. debt by China it would require more than 5 years to lower its stake by $200 billion, mentioned in GT article. Increasing selloffs by China is hardly possible as it would be like to shoot oneself in the foot as selling such huge amount of debt would certainly dump Treasuries’ prices. In this case, foreign reserves of China would also decrease significantly, as the gains from these sales would also deteriorate. Massive selloff of the U.S. debt will lead to a weaker U.S. Dollar, which is hardly acceptable to China as its exports would be much cheaper and less competitive on the global market. Exports are crucial for a rapid economic recovery of China considering U.S.-China trade tensions and rising tariffs.
Besides, if such an amount of Treasuries was sold once off, it is reasonable to wonder where this huge amount of money would be reinvested. China could not increase imports in such volumes. There is no financial market other than safe haven U.S. debt to absorb it. Moreover, U.S. Treasuries’ yields are still attractive even if they fell to 0.7% recently. No alternative assets with such liquidity and reliability together with low, but still attractive yields exist globally for the moment. The U.K Bonds provide the annual yields of 0.2%, Japanese bonds – 0.04% and Germany bonds – minus 0.5%.
So, a massive selloff of the U.S. debt by China looks more like a phantom menace that would materialise only in extreme cases that are not in a horizon nowadays.
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