5th September, 2020
By Agency Reporter
China may gradually cut its $1.074 trillion holdings of U.S. Treasury bonds and notes, Chinese newspaper Global Times reported, quoting experts.
The move is being linked to the rising tensions between Beijing and Washington.
“China will gradually decrease its holdings of U.S. debt to about $800 billion under normal circumstances,” Xi Junyang, a professor at the Shanghai University of Finance and Economics, told Global Times, without giving a detailed timeframe.
“But of course, China might sell all of its U.S. bonds in an extreme case, like a military conflict.”
China, the second largest non-U.S. holder of Treasuries, held $1.074 trillion as of June, down from $1.083 trillion in May, according to latest official data.
The newspaper reported that China has been reducing its US treasury bonds holding by 3.4 percent yearly.
Reuters quoting market watchers suspect China may not have necessarily sold U.S. Treasuries as it may have used other custodians to purchase Treasuries.
Dropping to $800 billion from the current level could mean shrinking its holdings by more than 25%. Analysts say large-scale Chinese selling, often referred to as the “nuclear option”, could trigger turmoil on global financial markets.
Another reason the state newspaper cited was the potential default risk in the United States as the debt of the world’s largest economy has surged sharply to about the same size of its gross domestic product, a level not seen since the end of the World War Two and well above the internationally recognized safety line of 60%.
China is heavily exposed to the U.S. dollar and dollar-denominated assets. Its official foreign exchange reserves stood at $3.154 trillion at the end of July.
Excerpt from Global Times:
The US Congressional Budget Office said on Wednesday that the amount of debt issued by the US government will amount to about 98 percent of US GDP this year, a level not seen since the end of the World War II — and well above the internationally recognized safety line of 60 percent. The federal deficit is projected to surpass the US economy’s size in 2021.
Zhou Maohua, an analyst at the Everbright Bank, said that although the US has never defaulted on its federal debts, it’s unlikely that US Treasury bonds will be dumped in the short term, and holders of those bonds — including China — face increasing default risks in the long term.
“Not defaulting before does not mean it won’t default in the future, and risks are accumulating with the ballooning debts and the slumping economic outlook in the US,” he told the Global Times on Thursday.
On the other hand, the rise of US debt amid a great recession will push the US Federal Reserve to cling to very loose monetary policy to stimulate the economy and increase taxes. This will cause returns on the US dollar to edge down, making the assets less attractive to bond holders including China, Zhou said.
“In the long term, many countries will diversify their foreign exchange reserve assets to decrease reliance on US-dollar assets, as they look to minimize risks caused by higher US debt and its shift to protectionism,” he said.
Xi also noted that China will slash its holdings of US bonds if US moves to sanction the country financially, such as cutting the Chinese mainland or Hong Kong out of the US dollar payment system, or called SWIFT.