Will China dump US Treasuries? No, it can’t afford to…

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Investopedia

Why China Buys U.S. Debt With Treasury Bonds

By SHOBHIT SETH Updated Apr 14, 2020

China has steadily accumulated U.S. Treasury securities over the last few decades. As of December 2019, the Asian nation owns $1.07 trillion, or about 5%, of the $23 trillion U.S. national debt, which is more than any other foreign country. As the trade war between the two economies escalates, leaders on both sides seek additional financial arsenal.https://011fae89b133e445ef8157138b804554.safeframe.googlesyndication.com/safeframe/1-0-37/html/container.html

Some analysts and investors fear China could dump these Treasurys in retaliation and that this weaponization of its holdings would send interest rates higher, potentially hurting economic growth. This article discusses the business behind the continuous Chinese buying of U.S. debt. 

KEY TAKEAWAYS

  • China invests heavily in U.S. Treasury bonds to keep its export prices lower.
  • China focuses on export-led growth to help generate jobs.
  • To keep its export prices low, China must keep its currency—the renminbi (RMB)—low compared to the U.S. dollar.
  • China chooses U.S. Treasuries to invest in, versus real estate, stocks, and other countries’ debt, because of their safety and stability.
  • Although there are worries of China selling off U.S. debt, which would hamper economic growth, doing so poises risk for China as well, making it unlikely to happen.

Read the full article here:

https://www.investopedia.com/articles/investing/040115/reasons-why-china-buys-us-treasury-bonds.asp

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Investopedia

Why Does China Buy U.S. Treasury Bonds?

Updated Jun 21, 2019

China is a manufacturing hub with an export-driven economy highly dependent on exports to the U.S.Chinese exporters receive U.S. dollars for the goods they sell to the U.S., but they need renminbi to pay their workers. They sell dollars to get RMB, increasing the dollar supply and raising demand for RMB. China wants to maintain export-led growth, so its RMB must be lower in value than the dollar so prices can be cheaper. China’s central bank buys excess U.S. dollars from exporters and gives them RMB to keep the dollar rate higher. Otherwise, the RMB would appreciate, making Chinese exports costlier, leading to unemployment as exports slow. But by keeping the RMB low, the dollar piles high among China’s forex reserves. China puts its trillions of dollars in forex reserves in the safest investment it can find—U.S. Treasury securities. This means China is making loans to the U.S. so the U.S. can keep buying China’s goods. Both nations benefit. China gets a huge market for its products, and the U.S. pays economical prices for China’s goods. If China offloaded some of its U.S. debt, an excess supply of U.S. dollars would reduce the dollar’s value and make the RMB appreciate. China’s products would cost more, ending China’s pricing advantage. China’s trade surplus would then become a deficit, something no export-driven economy wants.  

https://www.investopedia.com/video/play/why-does-china-buy-us-treasury-bonds/

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Reuters

Explainer: Will China dump U.S. bonds as a trade weapon? Not so fast

Richard Leong

(Reuters) – The trade war between Beijing and Washington has stoked concern in financial markets that China might opt to weaponize its holdings of more than $1.1 trillion worth of U.S. Treasuries in retaliation for the tariffs the Trump administration has imposed on Chinese imports.

Often referred to as the “nuclear option,” choosing to dump so large a pool of assets would likely destabilize world financial markets, drive interest rates higher and push tensions between the world’s two largest economies into uncharted territory.

China has been slimming its Treasury securities portfolio for some time, but most analysts see an aggressive reduction of its holdings as a remote possibility at most. There is no evidence Beijing is seriously looking to flood markets with its U.S. bonds.

Here are some key points about China’s Treasuries portfolio:

As a net exporter to the United States and the rest of the world, China has the world’s largest stash of foreign-exchange reserves at more than $3 trillion. Much of that is denominated in U.S. dollars accumulated through its persistent trade surplus with the United States since the early 1990s.

A natural place for China to park a lot of those greenbacks is the U.S. Treasury market, which is by far the largest and most liquid pool of safe assets in the world.

Also, since the financial crisis of 2007-2009, U.S. Treasuries have consistently yielded more than bonds issued by other large developed economies such as Japan and Germany, which has been another lure.

Most analysts agree that large-scale selling by Beijing would disrupt the Treasury market and other markets.

WHAT IS THE RISK TO CHINA IF IT DUMPS TREASURIES?

Most analysts argue China has not opted to sell Uncle Sam’s IOUs because a nosedive in U.S. bond prices also would bring down the value of China’s remaining Treasury holdings.

Also, China’s currency, the yuan, is not fully free floating. Beijing uses its Treasury holdings as a key tool to stabilize the yuan within a targeted range, against the dollar in particular.

Some critics have alleged China uses Treasuries and its other currency reserves to hold down the yuan, making its exports more attractive. At the same time, allowing the currency to cheapen too much risks other problems, such as foreign capital flight.

Any sharp depreciation in the greenback might force Beijing to defend the yuan, which may mean shedding more of its Treasuries stake. Back in 2016, China’s Treasuries holdings fell sharply by some $200 billion from May to November of that year as the yuan depreciated on worries about the Chinese economy.

Lastly, any knock-on effect in the U.S. economy would also be felt in China because the United States is the destination for nearly a fifth of Chinese exports.

https://www.reuters.com/article/us-usa-trade-china-bonds-explainer/explainer-will-china-dump-u-s-bonds-as-a-trade-weapon-not-so-fast-idUSKCN1SY0BS

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cnbc

BlackRock: The chances of China actually selling its Treasurys are ‘very low’

Published Tue, May 14 20193:24 AM EDT
Saheli Roy Choudhury@sahelirc

  • The probability of Beijing selling off all or most of its U.S. Treasury holdings in response to escalating trade tensions is “very low,” according to Neeraj Seth, head of Asian credit at BlackRock.
  • He pointed out that among developed markets, U.S. government debt is one of the highest-yielding risk-free assets possible.
  • The amount in Treasurys that China currently owns is a fraction of the total $22 trillion in U.S. debt outstanding but it is more than 17% of the various securities held by foreign governments.

https://www.cnbc.com/2019/05/14/blackrock-chances-of-china-selling-us-treasury-bonds-are-very-low.html

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Investopedia

Why China Buys U.S. Debt With Treasury Bonds

By Shobhit Seth Updated Apr 14, 2020

China has steadily accumulated U.S. Treasury securities over the last few decades. As of December 2019, the Asian nation owns $1.07 trillion, or about 5%, of the $23 trillion U.S. national debt, which is more than any other foreign country. As the trade war between the two economies escalates, leaders on both sides seek additional financial arsenal.

Some analysts and investors fear China could dump these Treasurys in retaliation and that this weaponization of its holdings would send interest rates higher, potentially hurting economic growth. This article discusses the business behind the continuous Chinese buying of U.S. debt. 

Key Takeaways

  • China invests heavily in U.S. Treasury bonds to keep its export prices lower.
  • China focuses on export-led growth to help generate jobs.
  • To keep its export prices low, China must keep its currency—the renminbi (RMB)—low compared to the U.S. dollar.
  • China chooses U.S. Treasuries to invest in, versus real estate, stocks, and other countries’ debt, because of their safety and stability.
  • Although there are worries of China selling off U.S. debt, which would hamper economic growth, doing so poises risk for China as well, making it unlikely to happen.


Hence, as long as China continues to have an export-driven economy with a huge trade surplus with the U.S., it will keep piling up U.S. dollars and U.S. debt. Chinese loans to the U.S., through the purchase of U.S. debt, enable the U.S. to buy Chinese products. It’s a win-win situation for both nations, with both benefiting mutually. China gets a huge market for its products, and the U.S. benefits from the economical prices of Chinese goods. Beyond their well-known political rivalry, both nations (willingly or unwillingly) are locked in a state of inter-dependency from which both benefit, and which is likely to continue.

USD as a Reserve Currency

Effectively, China is buying the present-day “reserve currency.” Until the 19th century, gold was the global standard for reserves. It was replaced by the British pound sterling. Today, it is the U.S. Treasurys that are considered virtually the safest.

Since the U.S. dollar has a variable exchange rate, however, any sale by any nation holding huge U.S. debt or dollar reserves will trigger the adjustment of trade balance at the international level. The offloaded U.S. reserves by China will either end up with another nation or will return back to the U.S.

Repercussions

The repercussions for China of such an offloading would be worse. An excess supply of U.S. dollars would lead to a decline in USD rates, making RMB valuations higher. It would increase the cost of Chinese products, making them lose their competitive price advantage. China may not be willing to do that, as it makes little economic sense.

If China (or any other nation having a trade surplus with the U.S.) stops buying U.S. Treasurys or even starts dumping its U.S. forex reserves, its trade surplus would become a trade deficit—something which no export-oriented economy would want, as they would be worse off as a result. 

The ongoing worries about China’s increased holding of U.S. Treasurys or the fear of Beijing dumping them are uncalled for. Even if such a thing were to happen, the dollars and debt securities would not vanish. They would reach other vaults.

https://www.investopedia.com/articles/investing/040115/reasons-why-china-buys-us-treasury-bonds.asp

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the balance

US Debt to China, How Much, Reasons Why, and What If China Sells

Why China Is America’s Biggest Banker

By Kimberly Amadeo

Kimberly Amadeo

Reviewed by Somer G. Anderson Updated April 19, 2020

The U.S. debt to China was $1.09 trillion through February 2020.1 That’s more than 15% of the $7.06 trillion in Treasury bills, notes, and bonds held by foreign countries. The rest of the $24 trillion national debt is owned either by the American people or by the U.S. government itself.2 https://tpc.googlesyndication.com/safeframe/1-0-37/html/container.html

China has the second-greatest amount of U.S. debt held by a foreign country. Japan tops the list owning $1.27 trillion.1

If China Called in Its Debt Holdings

China’s position as America’s largest banker gives it some political leverage. It is responsible for low interest rates and cheap consumer goods. If it called in its debt, U.S. interest rates and prices would rise, slowing U.S economic growth. 

On the other hand, if China called in its debt all at once the demand for the dollar would plummet. This dollar collapse would disrupt international markets even more than the 2008 financial crisis. China’s economy would suffer along with everyone else’s.

If China ever did call in its debt, it slowly would begin selling off its Treasury holdings. However, even at a slow pace, dollar demand would drop. That would hurt China’s competitiveness by raising the yuan’s value relative to the dollar. At some price point, U.S. consumers would buy American products instead. China could start this process only after it further expanded its exports to other Asian countries and increased domestic demand. 

China’s Debt-Holder Strategy Is Working

China’s low-cost competitive strategy worked. Its economy often grew more than 10% for the three decades before the 2008 recession. As of 2018, it’s growing at almost 7%, a more sustainable rate.4

China has become the largest economy in the world, outpacing the United States and the European Union. China also became the world’s biggest exporter in 2010. China needs this growth to raise its low standard of living. For these reasons, expect China to continue to be one of the world’s largest holders of U.S. debt.

https://www.thebalance.com/u-s-debt-to-china-how-much-does-it-own-3306355

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