Who Wins if China Dumps US Treasuries?

Mish

Yet another report surfaced on China dumping US treasuries. Let's take a look.

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.

Who Wins?

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

  1. 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.
  2. 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.
  3. If they buy the currencies of developing countries, they take highly pro-cyclical credit risks that they have been actively trying to reduce.
  4. 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.
  5. If they remain in RMB, of course, their currency will rise in value and their trade surpluses will disappear.
  6. 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.

Who Wins?

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?

Mish

Comments (56)
No. 1-22
flubber
flubber

I have a stupid question....
Why does China or any other country feel the need to buy US Treasury Bonds (or bonds of any other reliable country for that matter)??

CzarChasm-Reigns
CzarChasm-Reigns

(OT) Whatever floats your boat, was apparently in short supply:

Boats participating in a Trump support parade sink in Texas, officials say

Eddie_T
Eddie_T

This kind of cogent analysis is why I've read Mish for more than 10 years.

nlightn
nlightn

It is rumored that China possesses a huge amount of tonnes of Gold and is still purchasing.

It is also rumored that China is working on a cryptocurrency backed partially with Gold.

With the potential for China to unload 20% of US Tres,...let's just say they are most definitely playing on a multi-level chess board.

PecuniaNonOlet
PecuniaNonOlet

58 days till election. All I know is that we are all losers.

Casual_Observer
Casual_Observer

Fox news reporter Jennifer Grifffin confirms the Altantic story on Trump and his comments on soldiers dying being losers. It's another bad day for Trump. Multiple boats in Trump boat parade in Lake Travis in Austin have to make distress calls ans multiple rescues have to be made. It isnt going to go well for Trump now that the calendar has turned to september. His only choice will be to try to steal the election and also get Russia to interfere again.

Casual_Observer
Casual_Observer

Theoretically the run up in the stock market makes sense if China has been liquidating dollars. But once the market figures this out it will tank. All the unpredictability by Trump has led to opportunities for China, Russia and Iran around the world. I smell a huge decline in markets come election day. China holds the trump card in this house of cards.

davebarnes2
davebarnes2

Let's discuss dumplings instead of dumping.
Who doesn't love Chinese dumplings?

Sechel
Sechel

If China sells Treasuries the dollar goes down but also treasury yields rise something Trump does not want. Russia is a 3rd world economic power They don't have China's clout when it comes to leverage.

Seems Trump has a new favorite weapon in his arsenal against China. Instead of tariffs he bans them or blocks companies from selling technology. It's an evolution of his carousel tariffs. Now he keeps China guessing as to which company he's going to ban from the U.S. It's very disruptive. I would not underestimate China's anger at this tactic.

Six000mileyear
Six000mileyear

China doesn't have to measure its investment success in terms of financial profits or losses. The US bonds in its portfolio can be used as a weapon against the US. China's bond selling would cause higher interest rates, absorb liquidity, and slow US economic growth. If the FED printed to absorb the bond sales, then the action would be a self inflicted wound to the US dollar. What China really wants is global power from its investments. If it wanted products at low prices, it could beat it out of its citizens.

SherWat
SherWat

If they buy other USD assets, nothing has changed.
<<<

Really?
Suppose the sales are just for Dollar cash balances.
Agree that nothing happens for FX or trade movements, but the scale of the sales could depress the UST market...and the US needs the UST market to fund the deficit.

Tony Bennett
Tony Bennett

"These stories surface at least 2-3 times a year and always with the same idle threats that never happen."

...

Liquidity.

China knows - as do other very large sovereign / institutional funds - the depth of the Treasury market (largest on the planet) is its greatest ASSET. Where else can you put / remove tens (hundreds) of $billions at a moments notice with barely a ripple?

China has no choice but to remain in Treasury market.

Mish
Mish

Editor

Six000 you totally and completely missed the point of the article.

China has NO WEAPON in treasuries to use against the US

dr smock
dr smock

China stopped buying our bonds during the "Great Recession". They were absolutely furious when their HUD and FHA US government mortgage bond holdings collapsed. They demanded all their money back from these entities and Bernanke obliged. It was close to 1 Billion dollars that they had in these instruments. Since then, their other US government bond holdings have flat lined because of the massive amount of money Bernanke, Yellen, and Powell have printed to bail out the US. They use the money they get from their US trade surpluses to buy up our companies, farmland, and other real estate.

Bam_Man
Bam_Man

Don't these Chinese geniuses know that the Fed has a printing press and now have absolutely no reservations whatsoever about using it?

George_Phillies
George_Phillies

There is a minor gap in the proposal that the Chinese would sell the bonds and take the proceeds in RMB. Do foreigners own 800 billion dollars of RMB that the Chinese can buy with their Treasury sales? I have no idea, but expect that you do. This is a slight variation on why the RMB cannot become a reserve currency...foreigners don't have many of them, do they?

I hope you are enjoying Utah.

Advancingtime
Advancingtime

We are seeing rising interest in both precious metals and cryptocurrencies. Several factors are driving this trend. One is the idea governments have targeted cash and wish to move us towards a "cashless" society where they control our every move. Another is rooted in the idea inflation is about to raise its ugly head as currencies are debased.

Most likely the dollar will be around for a while yet and could be about to strengthen. More on the state of currencies in the article below.

Advancingtime
Advancingtime

When people point to China's large holdings of U.S. Treasuries as proof of China's solvency they frequently discount the amount of debt that has grown in the Chinese system. Even though China owns these U.S. Treasuries, China is running a massive U.S. dollar shortage both on a corporate and a national level.

Much of the problem stems from Chinese companies having roughly $2 trillion U.S. dollar-denominated debt owed to international investors. The rubber will meet the road as more countries that export to China question the value of the Chinese currency and demand payment in dollars and refuse the yuan. China's currency is pure junk.

Pemadago
Pemadago

Going by how America is bullying all the countries in the world, it is advisable that China dump all its holding of American bonds, bills and notes in order to save itself from the risk of America defaulting on its debt obligations. It should not suffer all the doom and gloom financial experts and analysts like to put forth, because after all America is not only the country in the world with which it can do business only. Given the present threat and rhetorics from America, it is wise on part of China to de-couple altogether from America and think of doing business with other countries despite suffering economic losses. After all, it is better to suffer some economic losses than suffering continued harresment from an administration led by an unprincipled and valueless US President.

Mumbojumbo
Mumbojumbo

There is one result not mentioned when China dumps their USD holdings. All that the author mentioned is as expected but one thing I think is overlooked is the affect on USD economy. The credit (China's cheap goods for T Bills) will no more be available as a result of decoupling. With next to zero savings and a population that consumes more than they produce there will be a big drop in the standard of living of Americans. In short US will be affected as much as the rest of the world.
which country will come out on top boils down to the pain thresh hold of the citizens of each country


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