Who Wins if China Dumps US Treasuries?
Decoupling Risk Looms
Please consider China May Ditch US Treasuries as Decoupling Risk Looms.
China could gradually cut its holdings of US Treasury securities by about 20 per cent to US$800 billion, the state-backed Global Times reported on Friday, as Beijing continues to weigh options to insulate itself from tensions with Washington.
China’s Development Research Centre, a think-tank under the State Council, said this week it was possible Washington might seize China’s holdings of US government securities if the bilateral relationship devolves into a full-on confrontation.
Xi Junyang, a professor at the Shanghai University of Finance and Economics, was quoted as saying by the Global Times that China will “gradually decrease its holdings of US debt to about US$800 billion under normal circumstances. But of course, China might sell all of its US bonds in an extreme case, like a military conflict,” he said.
Jing Sima, China strategist at BCA Research, a consultancy in global investment research and strategy, said that Beijing could look to Russia for steps in managing exposure to the US dollar amid threats Chinese banks could be cut off from the dollar payment system.
I do not always agree with Michael Pettis on trade matters but I do at least 85% of the time as I do now.
This topic comes up repeatedly.
Michael Pettis Twitter Thread - 6 Key Ideas
- Here we go again. I am not sure how credible a source Global Times is, but for Beijing selling US Treasuries isn’t the hard part. The hard part is what the PBoC does with the proceeds. If they buy other USD assets, then nothing has changed.
- If they buy euro, yen, sterling, etc., they will unleash anger from these countries who will suffer disinflationary pressures as their currencies rise against the dollar, and who will have to absorb the consequent reduction in the US current account deficit.
- If they buy the currencies of developing countries, they take highly pro-cyclical credit risks that they have been actively trying to reduce.
- If they stockpile commodities, given how important Chinese growth is for commodity prices, they lock in a huge amount of volatility and more unwanted pro-cyclicality into their balance sheets.
- If they remain in RMB, of course, their currency will rise in value and their trade surpluses will disappear.
- Over the short term Beijing is probably better off by reducing the threat of Washington’s cutting it off from the USD system, but economically, and geopolitically over the longer term, the US benefits more than anyone else from a gradual Chinese reduction of USD holdings, which is why Washington should be pushing for this, not Beijing.
I took a 5-Point Thread by Pettis and broke it up into 6 key ideas.
Credibility - Here We Go Again
How credible is the Global Times? I do not know either. But that is not a precise enough question.
Here is a better question: How credible is the author of this story?
My conclusion is not very.
Russia colluding with China to form some currency alliance is not very believable outside of some trivial amount made for political purposes.
These stories surface at least 2-3 times a year and always with the same idle threats that never happen.
Understanding the Key Issues
Pettis hits the nail on the head with points 1, 4, and 5.
- If China dumps treasuries for the RMB (Yuan), the Yuan strengthens and Trump cheers.
- If China dumps treasuries for other US assets, nothing happens at all.
- If China dumps treasuries for commodities it pushes up prices even though it is a huge importer.
Pettis point #3 is not going to happen because tiny countries do not have enough bonds for China to buy and it would severely distort the market if China tried, so it won't.
Pettis point #2 is more subtle but also note that there is no Euro global bond for China to even buy. There are only sovereign bonds of Germany, Italy, France, etc., with German 10-year bonds at a negative yield of 50 basis points and the 2-year bond sporting a negative yield of 70 basis points.
Never a Complete Explanation
Every time these dump treasury stories appear they never say what China will do with the proceeds of the sale.
The authors either have no answer or even more likely don't understand the issues at all.
Either way, it's a credibility issue.
No matter how one twists or turns, the US wins if China dumps US treasuries.
China occasionally manages US treasuries in a fashion that people often claim as "dumping".
However, the typical reason is China needs to support the Yuan (sell dollar and stabilize or increase the price of the Yuan) to stop capital flight.
As explained by point 5, that too helps the US even though it is a necessity for China as well.
What Would It Take to Dethrone the Dollar?
These dumping stories are often related to unfounded threats of China preparing for the yuan becoming the next global reserve currency.
Forget about that notion as well.
For discussion, please see What Would It Take to Dethrone the Dollar?