The secret weapon of Beijing: China is ready to sell its US bonds

China
File Reuters

UNITED STATES (VOP TODAY NEWS) — Beijing and Washington could put an end to the trade war that pits them on March 27. Nevertheless, China, the main creditor of the United States, began to actively dispose of its investments in the US public debt.

Laurence Fink, CEO of BlackRock, the largest asset management company in the world, believes that resolving the US-China trade dispute will only accelerate Beijing’s process of separation from its US bonds. Should we expect a massive sale?

Important wave of sales in 2018

At the end of 2018, the Bank of China held $ 1.120 billion worth of US bonds, representing 28% of all US public debt in the hands of foreign holders.

Other major creditors include Japan (which has $ 1.030 billion of US debt – 25.7%), Brazil ($ 303 billion – 7.5%), Ireland ($ 280 billion – 7% ) and the United Kingdom ($ 273 billion – 6.8%).

However, in recent times, analysts are seeing a significant reduction in investment in the US public debt.

In June 2018, Japan’s bond portfolio reached its lowest level in seven years. Russia and Turkey, which have suffered economic pressure from Washington, have left the top-30 US bondholders. Knowing that Moscow has sold almost all of them.

Too late

It is China that raises the biggest fears. In 2013, Beijing still held $ 1.3 trillion worth of US bonds. End 2016-early 2017, the Chinese had reduced their assets to offset the strengthening of the yuan, before recovering everything. But sales resumed last year. In the end, China sold 13.8% of its bonds in five years.

The sale of bonds allows Washington to finance growing federal spending that stimulates economic growth and keeps interest rates low. What also works for China: investments in bonds weaken the yuan against the dollar. In the end, imported Chinese goods cost Americans less than their own products.

But the financial dependence of China is strengthened, which is all the more notable against the background of the disputes of recent months. The damage of the trade war triggered by Washington is already in billions for both countries. And Beijing has warned several times that if this continues, it should sell its shares in US debt. The reason would be mainly economic: it would be to ensure the stability of the yuan.

At present, Washington is about to sign a truce with Beijing, but analysts are convinced that even if a trade deal is signed, China will continue to sell its US bonds.

As Laurence Fink noted, this could be due to the agreement itself, which would be “far from perfect”. China has accumulated shares in the US debt especially because of the surplus in trade, says the economist. If Beijing agreed to reduce the trade surplus, it would have much less money to invest in US debt.

“China will continue to reduce its purchases of US bonds. Given the growing budget deficit, this points to very negative consequences for the US Department of Finance. In the end, the Treasury may lose out, “says Laurence Fink.

Why China holds so many US bonds

Maintaining competitive export prices is an important part of China’s economic strategy. It guarantees these by maintaining the price of the yuan against the money basket, mainly in dollars. When the dollar falls, Beijing uses the available reserves of US currency to buy bonds. The government gets this money from Chinese companies, which they derive from exports. The acquisition of bonds leads to a rise in demand for the dollar and therefore its strengthening.

China, which is the largest US creditor, therefore has a powerful lever of political and economic pressure on Washington. Beijing periodically uses it threatening to launch the sale and collapse the US public debt market. If the Chinese put this threat into effect, the Americans would be confronted with the instability of the dollar and the slowing of the economy.

“The economy will be shaken by high interest rates everywhere, which will have a strong slowing effect,” said Jeff Mills of the US PNC Financial Services Group.

Global demand for the dollar could fall sharply. The collapse of the US currency will hit international markets stronger than the 2008 financial crisis. Everyone will be affected, including the Chinese economy.

This is why the most likely scenario is a gradual and continuous sale of US bonds by Beijing. Which is not bad for Washington either.

Analysts at Deutsche Bank find that demand for US public debt is falling inevitably and that foreign central banks have been selling these assets for four years. They warn that to ensure stable demand for bonds, current interest rates may be too low.

“Will it increase by sacrificing economic growth to offset the additional supply of bonds in a context of weak demand? This is just one of the questions the White House will have to answer, “says the BlackRock boss. And, above all, we must think about who will be the new buyer of US debt that will offset the permanent reduction in demand.

This article is written and prepared by our foreign editors writing for VOP from different countries around the world – edited and published by VOP staff in our newsroom.

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