“Will China Dump US Treasuries?”

“Will China Dump US Treasuries?”

A tweet from Hu Xijin, editor-in-chief of the Global Times grasped attention on Tuesday morning,  and even Bloomberg reported that it had triggered a readership surge on its Terminal.

It came at a time when China responded to the additional tariffs by increasing duties on $60 billion worth of US goods. The tweet was controversial as it raises questions on whether China is threatening the US on its debt through the media.

As of 02/2019, China remains the major foreign holder of US Treasuries. In the graph below, the trend is showing that China is not actively buying US Treasuries and has trimmed its exposure over the years. However, it is important to highlight that they are also not aggressively selling US Treasuries. After reaching a peak in 2011 with $1.31 trillion, their holdings dropped to $1.13 trillion.

Source: Bloomberg Terminal

A large sale of US treasuries will be painful for both the US and China.

US Treasuries are risk-free assets that China might need to keep as a cushion for its economy rather than using it as a fighting tool in a trade war. It will also strengthen its currency which will be bad for its imports and economy. Overall, the effect will be harmful to China which is why the chances are selling US Treasuries are low.

Markets are calling it the “nuclear weapon or self-destructive nuclear option” as its effects will be disastrous, but it is being used as a weapon to threaten the other party.

President Trump did not remain silent and tweeted that it would be “game over” if the Federal Reserve steps in. The latter will go back to quantitative easing and buy Treasuries to bring down yields and curb an upward move in the interest rate.

The reality of trade tariffs is scary and the tit-for-tat actions are putting the global markets on edge. On the economic data front, Chinese data released this morning are darkening the outlook for the latter. Both Industrial Production and Retail Sales took a dip and came way below expectations.

Source: Bloomberg Terminal

Similarly, there are also some signs of weakness in the American economy as per key economic indicators. There is a lot at stake, and even if both countries have access to policy tools to withstand the negative impact of the trade tensions, the long-term costs are not reassuring.

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