Hi, I’m Lucas Nieuwenhuis a news editor –
and trade war correspondent at SupChina – based in New York City – and today we’ll
be talking about China’s so-called nuclear option…of weaponizing U.S.
Treasury holdings. Right now, China is neck-and-neck with Japan as a top
foreign creditor of the U.S. holding 1.1 trillion dollars in US
Treasury bonds.That accounts for 4 to 5 % of America’s national debt – which is a staggering 22.5 trillion dollars. America’s
addiction to debt and China’s willingness to buy it, is nothing new… but
the continual escalations of the US-China trade war had revived worries
that China will try to weaponize its US Treasury holdings. China could in theory
sell off a massive amount of US debt in an attempt to destabilize the American
economy. The media has become fond of calling this China’s “nuclear option” but
the nuclear option is overhyped. It is technically true that a sell-off of
American debt could destabilize the U.S. That’s because flooding the foreign
exchange markets with potentially hundreds of billions of dollars in
American debt would decrease the price of US Treasury bonds and increase their
interest rates. The interest rates on US Treasury bonds are the benchmark for
borrowing throughout the economy, so essentially all investment in the US
would become more expensive overnight. But China would almost certainly not go
this route; first of all because it would not be very effective. No central bank in
the world outside of China other than the US Fed has enough resources to buy
so many Treasury bonds at once, so the Fed would just buy back most or all of
the Treasuries that China floods the market with. But perhaps more importantly,
the nuclear option would also hurt China and would, in fact, exacerbate the worst
direct effects of the trade war. Why is that? The amount of foreign reserves that
China holds and the strength of Chinese currency, called the renminbi or the UN
are inversely related. When China buys more foreign reserves the UN weakens.
When China sells foreign reserves, the UN strengthens. The last thing that China
would want, in an all-out trade war, is for the UN to strengthen. A stronger UN
means that the price of Chinese goods, for anyone outside China wanting to buy
them, goes up. That’s bad for Chinese exporting firms that want to sell to
foreign consumers. A bit of history on a Chinese currency value relative to the
US dollar. For about a decade from the mid 90s to the mid-2000s Beijing kept
the UN pegged at about 8.3 UN to the dollar – a fairly low rate that under
valued Chinese products for global consumers. That was advantageous for
Chinese exporting firms and is the origin of trumps accusation of Chinese
currency manipulation – but Trump is behind the times on Chinese economics.
For over five years now, China has not undervalued its currency. instead, China has propped up its currency against market forces to keep it stable.
this was obvious during the first year of the trade war, as the UN bounced twice,
close to seven to the dollar but never broke that limit because the Chinese
central bank didn’t allow it. Beijing only allowed the UN to
depreciate it beyond that level once the trade war entered its second year and
Trump announced yet another tariff escalation, putting a trade deal far out
of reach in the near term. For years China has bought American debt primarily
as a tool to keep its exchange rate stable. In summary, it is unlikely to do a
massive sell-off of American debt… largely because it would destabilize the
exchange rate. Beijing wouldn’t just hurt the U.S. with that move but would also be
shooting itself from the foot. you