A contrarian view has emerged in Beijing after the American polls and pundit dismissed the notion that China would dump its vast holdings of US Treasury debt as retaliation against US tariffs. The contrarian views state that the government may form a weapon of last resort by using the securities.
Five percent of the total US national debt amounts to China’s US$1.12 trillion holdings account. This means that any material damage on the US economy coming from a bond sale would be limited. Also, even if it leads to market volatility, China’s remaining holdings would be hurt, which could lead to the Chinese viewing it as a risky move.
According to Mather Hornbarch, an analyst at Morgan Stanley, while they think China continues to sell Treasuries as it has done for the most of last year, they don’t believe that the pace at which she is selling will increase a direct response measure for tariffs. Hornbarch added that they think the speed at which China sells Treasuries will continue to track the pace at which they see capital inflows.
According to some analysts and reports distributed on China’s social media; with Beijing vowing to fight and the US preparing to place 25 percent tariff on further US$300 billion of Chinese imports, China may have no choice but to sell the US Treasury holdings. This would, however, devalue US bonds leading to yields rising sharply. China’s currency would be strengthened against the US dollar if they converted the dollar proceeds from their sales back to yuan.
Another line of thought is that since the trade war could take away the US as a viable market for Chinese exports, a strengthening Yuan against the dollar; which could turn Chinese goods to be more expensive for American buyers may be seen as a welcomed outcome by Chinese policymakers.
Reference