Who Wins If China Dumps US Treasuries?

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.
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