Opinion | Why the trade war won’t prompt Beijing to dump its US Treasuries
Selling off its US$1.2 trillion holdings would inflict pain on China – but it may or may not bring harm to the United States, writes Zhang Lin
With Beijing and Washington continuing to face off over trade, is China likely to sell off its US Treasuries to hurt America? The simple answer is no.
A trade war is essentially a competition about who will be more miserable. If China – America’s largest foreign creditor – sells off its US Treasuries, it will bring down their price and raise their yields. So in theory, China’s holdings of US government debt are a powerful weapon in the trade war.
In reality, the creditor is always in a weaker position than the debtor, and China won’t be able to pressure Washington by threatening to dump US Treasuries.
Foreign investors hold US$6 trillion of outstanding US government debt – which totals around US$20 trillion. China’s holdings of nearly US$1.2 trillion account for about 20 per cent of all US Treasuries in the hands of foreign investors, and 6 per cent of total US government debt.
For China, that means it may have invested some 60 per cent of its dollar-denominated foreign exchange reserves in US Treasuries.
It’s critically important for Beijing to ensure the value of its US dollars because the greenback is its main diplomatic tool for buying influence in Asian, African and Latin American countries with low-interest loans and aid. Those dollar assets also make it possible for China to promote its “Belt and Road Initiative” – a vast trade and infrastructure network spanning Asia, Africa and Europe – via overseas direct investment.
And with few countries in the world in a position to buy such a huge chunk of US bonds, bills and notes from Beijing, it would be nearly impossible for China to find a buyer unless it sold them at a heavy discount.
