Merely 5 years ago, Chinese citizens were celebrating U.S. National Debt clock striking $18 trillion, out of which $1.17 trillion belonged to China. Many people erroneously believed that this could be a game-changing instrument in a possible trade war. By reducing its U.S. debt holding, China could cause the drastic negative trends of the U.S dollar.
Even Hu Xijin, Editor-in-Chief of the state-affiliated Global Times, purportedly said that Chinese scholars are discussing how such a measure could be implemented without harming the Chinese economy.
In theory, that would push the Treasury prices lower and send yields higher. U.S. interest rates would rise, increasing costs for American consumers on things like mortgages and auto loans and for businesses seeking to raise capital.
Much to the regret of the US’s enemies, such a dramatic move would harm both sides. “When they start to sell U.S. Treasuries in the open marketplace, they are going to hold a lot more than they can sell before they knock prices down, and they don’t want to hurt their cash reserves,” Hogan told CBS MoneyWatch.
It is starting to look like the plot of Tom and Jerry show, where Tom (China) is trying to capture Jerry (USA), but rarely succeeds, mainly because of Jerry’s cleverness, cunning abilities, and luck. However, on several occasions they have displayed genuine friendship and concern for each other’s well-being.
Curiously, the market of U.S. Treasuries did not notice these threats at all. Actually, the demand for US Government Bonds has only increased.
The question then becomes, is there a reason for this?
First, this is an unrealistic event. China will not be able to sell such a huge amount of American Debt. Even if that was possible, what are they going to do with such a dollar cache? What currency are they going to exchange it for? The answer is very simple — there is nowhere to place it rather than in U.S. Treasuries.
Secondly, if China sells its U.S. bonds, there is no way it will crash the market of the American national debt. Do not forget about the most important and powerful player in this market — The Federal Reserve System. The size of its balance in 2017 was equal to 4.5 trillion dollars, now this figure is a bit less than 3.9 trillion dollars. If we compare this to $ 1.1 trillion, which China holds in treasuries, the situation does not look so bad anymore.
The Fed can simply buy out these bonds. But for that to happen, they would have to launch some analogue of quantitative easing, ultimately buying trillions of dollars of government bonds and mortgage-backed securities. By the way, that is exactly what Trump demands from the Fed.
The conclusion is very simple: Jerry always wins over Tom, and the ongoing situation is not an exception.