The Chinese nuclear option of dumping American debt would turn against it

by



[ad_1]

Investors are increasingly concerned about China's reaction to US tariffs once the shortage of goods on which it will have taxes will be lifted. China has many levers to pull, including the fall of its currency, blocking the export of rare earth minerals or the direction of the boycott of the iPhone and other US products.

The outbreak of tension in recent weeks has also led to speculation that China could reduce its holdings of US debt. The state media in China, the main holder of US Treasury securities, have amplified this speculation.

The Twitter account of Hu Xijin, editor of the Global Times in China, said earlier this month that "many" Chinese academics were discussing the "possibility of dumping US treasuries".

However, it is unlikely that Beijing will arm its vast holdings in US debt, as such a dramatic move would probably turn out, perhaps very badly. This would impoverish China's own financial resources, undermine confidence in its country as a responsible actor and scare world markets. And it is not even certain that the dumping of Treasury bills would even have the desired impact of harming the United States.

"China will not do that, it's a useless exercise," said Barry Bannister, Head of Institutional Strategy at Stifel.

Such a sale of funds would be detrimental to the value of US Treasury securities, leading to higher yields. This would be a big problem because the 10-year Treasury rate serves as a benchmark for other forms of credit. The costs of borrowing for everything from auto loans to mortgages to commercial debts would increase considerably.

"It's more possible now than at any time in recent history," said Guy LeBas, chief fixed income strategist at Janney Capital Management.

How could it turn around

However, analysts do not believe that China would actually dump Treasury securities in part because it would be like shooting itself in the foot. A discount sale would lose value to its own assets.

LeBas called it the "tear your nose" strategy.

"The last thing they want is to hurt the value of their remaining assets," said Michael Hirson, former chief representative of the US Treasury Department in China.

Why the mountain of debt of American companies is important

Hirson, currently head of China at the Eurasia Group, said it would reduce the amount of foreign exchange reserves Beijing has to defend its currency and maintain its financial stability.

China also has limited alternatives regarding the use of all its cash surpluses.

The redeployment of money on Japanese and German debt is not ideal. The 10-year bonds of both countries are currently showing a negative return, compared to the declining but still positive return of 2.2% for US Treasury bonds. The rate of 10-year German bonds plunged Friday to a record high.

And maintaining liquidity would risk allowing China's currency to strengthen too much, which tends to be deflationary.

"If China deflates, its banks will have more credit problems.It's the last thing they need," Bannister said.

Another problem of China's dumping treasures is that it risks destabilizing global financial markets at a time when they are already nervous. The financial turmoil could have repercussions on the real economy, exacerbating the current slowdown in the growth of China's trading partners.

"If you are waging a trade war with the United States, you want a stable economic environment for the rest of your exports," Hirson said.

Would it work?

It's not even clear that China would be able to create a panic in the US Treasury market.

China has sold $ 600 billion of US Treasury securities between the middle of 2014 and the end of 2016, but yields have fallen, according to Stifel's Bannister.

US debt is considered one of the safest assets on the planet. Demand from other foreign buyers, large life insurance companies, pension funds and large banks is strong, especially during recent market turbulence.

This demand would only increase if China scared investors by dumping US Treasury securities. During the frightening periods, the liquidity tends to flow on the American debt.

"There seems to be a ready market in a destabilized world for US Treasury securities in a sense of flight to safety," said Bannister.

Wall Street bets that the president will not let shares collapse

And a modest increase in US Treasury yields could prove to be temporary. Higher returns would likely only attract buyers, which would lower rates.

"China's dumping checks could panic world markets without harming the United States," Hirson said. "But that would hurt China's reputation as a source of stability and responsibility."

Rather than dumping on Treasury securities, analysts said China would seek further reprisals.

For example, there is growing speculation that Beijing will order restrictions on the export of rare earth minerals that are essential for the technology and defense industries. And on Friday, the Chinese Ministry of Commerce announced its intention to blacklist foreign companies that violate market rules, which could be a response to Huawei's ban on exports to the United States. United.

"If the goal is to degrade the US financial markets," said Mr. LeBas, "the sale of Treasury securities is not the solution."

[ad_2]

Source link