Not long ago, China hinted to have intentions to dump all US Treasury and agency bonds it holds if the relationship with America deteriorates further in the face of the ongoing Trade War. This veiled threat was interpreted by economic analysts as a cover for China to reduce its dollar exposure more aggressively, impacting directly at the dollar’s strength on the markets. Earlier this month, Chinese state-owned Global Times published a front-page article alerting that “China will gradually decrease its holdings of US debt to about $800billion under normal circumstances. But of course, China might sell all of its US bonds in an extreme case, like a military conflict,” according to Xi Junyang, a professor at the Shanghai University of Finance and Economics in an interview for the paper.
Some may think that an independent professor wouldn’t be an authority when it comes to point out China’s intentions on the geostrategic game, but his statement wouldn’t make the front page article if the Chinese government hasn’t sanctioned it. Therefore, the announcement was perceived as a message that China is ready to collapse the US Treasury market. Previously, advocates of the US government have argued that no one would buy China’s entire holdings, however, it is being suggested that China will put the Treasury holdings in trust for victims affected by the global sanitary outbreak. In that way, it would undermine foreign trust in the dollar and potentially bring its reserve role to a swift conclusion.
For the time being, the tide is calm, but if a storm sparks a financial war and China puts its entire holding on the market, Treasury yields would drastically climb, except if the Fed intervenes buying the whole lot. In such a scenario, China would have roughly a trillion dollars to sell, meaning it would drive the dollar down against whatever the Chinese buy. In fact, if the eastern superpower decided to dump its holding of US Treasuries, eventually, other foreign holders would follow the same move, and that would be the end for the dollar’s role as the world’s reserve currency, leaving the US and many other global economies in big trouble.
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