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© Reuters. PHOTO FILE: A worker makes gestures while a crane rides goods for export on a freighter in a port of Lianyungang, Jiangsu
By Richard Leong
(Reuters) – The Beijing-Washington trade war has sparked financial market anxiety that China may choose to personalize its holdings of more than $ 1.1 trillion worth of US treasuries in retaliation for human rights. customs duties imposed by the Trump government on Chinese imports.
Often called "nuclear option", choosing to get rid of such a large group of assets would likely destabilize the global financial markets, drive up interest rates and tilt the tensions between the two largest global economies on unexplored lands.
China has been narrowing its holdings of Treasury securities for some time, but most analysts believe that an aggressive reduction of its holdings is at most a distant possibility. There is no indication that Beijing is seriously considering flooding the markets with its US bonds.
Here are some key points about the portfolio of Chinese Treasury securities:
WHAT IS THE DEBT OF CHINA BY CHINA?
About a decade ago, China surpassed Japan as the main foreign holder of US public debt.
According to data from the US Treasury Department, its assets amounted to more than $ 1.12 trillion at the end of March. Japan is in second place with nearly $ 1.08 trillion.
China's assets peaked at the end of 2013 at nearly $ 1.32 trillion and has declined by about 15% since then. In March, they were the lowest in about two years.
Its share of the Treasury market has further declined faster due to the steady issuance of US debt needed to finance the growing deficit in the federal budget.
The second largest global economy holds about 7% of the outstanding US public debt, amounting to 16 188 billion dollars. This is the lowest share in 14 years and 14% in 2011. However, its share of the pie is exceeded only by the United States. The Federal Reserve, which holds $ 2.15 billion in Treasury securities, or 13.5% of the market.
The issuance of Treasury securities is expected to continue to accelerate following a massive tax cut adopted in December 2017. Therefore, China's market share is expected to continue decrease.
(CHART: China, Japanese positions on US Treasuries – http://tmsnrt.rs/2DJ1ckW)
WHY DOES CHINA HAVE A LOT OF AMERICAN DEBT?
As a net exporter to the United States and the rest of the world, China has the largest foreign exchange reserves in the world, with more than $ 3 trillion. Much of this amount is denominated in US dollars and has accumulated because of its persistent trade surplus with the United States since the early 1990s.
The US Treasury, which is by far the largest and most liquid pool of secure assets in the world, is a natural place where China reserves a large portion of these greenbacks.
In addition, since the 2007-2009 financial crisis, US Treasuries have always yielded more than bonds issued by other major developed economies such as Japan and Germany, which is another attraction.
(CHART: China's participation in US Treasury bonds versus the yuan – https://tmsnrt.rs/2HziSTz)
WHAT IS THE RISK FOR THE UNITED STATES IF CHINA SELLS?
Most analysts agree that large-scale sales by Beijing would disrupt the Treasury and other markets.
A sudden change in the balance between supply and demand could lower Treasury prices and boost yields, which is in the opposite direction of prices. This would result in higher borrowing costs for the US government.
In addition, given that Treasury yields are a benchmark for consumer and business credit in the United States, interest rates on all stocks, from corporate bonds to mortgages to homeowners, would increase, which would probably slow down the economy.
Such a decision would also upset the confidence of global investors in the US dollar, which is the main reserve currency in the world.
(GRAPHIC: Currency Composition of Foreign Exchange Reserves – https://tmsnrt.rs/2V2VgLt)
WHAT ARE THE RISKS FOR CHINA IF IT IS DUMPS OF CASH?
Most analysts believe that China has not chosen to sell Uncle Sam's IOUs, as a drop in US bond prices would also reduce the value of the remaining Chinese Treasury holdings.
In addition, the Chinese currency, the yuan, is not totally floating. Beijing uses its Treasury holdings as an essential tool to stabilize the yuan in a target range, especially against the dollar.
Some critics have claimed that China is using Treasury securities and other foreign currency reserves to hold the yuan, making its exports more attractive. At the same time, leaving too much money to the currency may pose other problems, such as the flight of foreign capital.
Any sharp depreciation of the greenback could force Beijing to defend the yuan, which could mean losing more of its share in treasury bills. In 2016, Chinese treasury assets fell sharply by $ 200 billion between May and November of that year, due to the depreciation of the yuan following worries about the Chinese economy.
Finally, any impact on the US economy would also be felt in China because the United States is the destination of nearly a fifth of Chinese exports.
(GRAPHIC: Sino-US trade: monthly figures – https://tmsnrt.rs/2Lzed8e)
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