(International relations) – The Sino-US confrontation flared up on new fronts, as the trade war is spreading to technology and possibly finance.
Is owning more than $ 1 trillion in US Treasury bonds a big advantage for China?
Sino-US confrontation in technology
In January this year, China and the United States took an important step towards ending the trade war, signing a Phase I agreement to gradually restore trade, but the coronavirus ruined everything. .
President Trump accused China of causing the COVID-19 pandemic and asked Beijing to write off its debt to compensate for the damage caused by the pandemic.
|According to experts, the process of China giving up the dollar and US Treasury bonds will proceed in phases|
In addition, the US announced to withdraw from the World Health Organization (WHO) because the organization “leaning towards China”.
Washington – Beijing tensions were increasingly complicated before the US presidential election.
Mr. Donald Trump was once again reminded of the economic damage Chinese companies have inflicted on the US economy, accusing them of stealing US jobs and intellectual property. .
The confrontation between Washington and Beijing began to flare up on the new front, as the trade war slowly turned into a technology one.
In August, Washington accused Beijing of interfering with the election campaign via the Internet and social networks, and blamed the Chinese app TikTok.
According to Washington, ByteDance products must be banned, otherwise, Beijing will be able to access the data of US citizens using the service.
Chinese firm ByteDance was forced to sell TikTok in the US. Mr. Trump threatened, this must be done before November 12, otherwise, TikTok’s service will be blocked.
It is not yet clear how Beijing will respond, but experts say the Chinese authorities have no specific motives to defend TikTok, as it is a time-consuming and harmful application. morally, spreading “vulgar content”, which is incompatible with “socialist values”, spoils young Chinese.
But for Huawei, one of the largest “Made in China” technology groups, the Chinese response is completely different.
Beijing has threatened to ban the export of strategic materials and technology to foreign companies that could pose a “threat to national security”;
At the same time, it reminds that China has more serious leverage, which is the amount of US government bonds worth more than a trillion dollars, the trump card in Beijing’s hands.
China is gradually reducing the amount of US bonds
Because of the trade war with the United States, China has begun to gradually withdraw the amount of bonds it owns in the US Treasury.
From the peak of 1.32 trillion USD in November 2014, China has sold 20% of the value of the US government bonds that it is holding, equivalent to more than 200 billion USD.
As a result, in June 2019, China ranked second in terms of the amount of money invested in US treasury bonds, just behind Japan in the list of America’s largest creditors (with $ 1.12 trillion. ).
According to the most recent report of the US Treasury Department, in mid-September, China’s investment portfolio fell to 1.08 trillion USD. So only in the first half of 2020, China has liquidated $ 106 billion of US bonds, the fastest rate of selling since 2015.
However, economic confrontation is not the only cause. One of the other reasons that China continues to reduce the amount of US treasury bonds is the risk of the dollar depreciation, because the US money printers continue to operate “tirelessly” to pay debts. increase.
In just eight months, the United States issued a record 7.7 trillion dollars in treasury bonds.
The “Global Times” of China notes that Beijing clearly sees that the US economy is supported only by loans.
At the present time, Washington cannot solve economic problems without the help of money printers, so investing in US national debt is extremely risky.
Tensions between Beijing and Washington are escalating, sparking fears that America’s second-largest foreign creditor might no longer stand it and sell off all US government bonds in an emergency. The consequences of such a move would be devastating.
The massive dumping of US government bonds worth more than 1000 billion dollars could not only reduce the exchange rate of the dollar, but also cause a “panic” in the stock market. This is an extremely dangerous scenario for the entire world economy.
So how far is Beijing willing to go? Analysts said that if China sold off a large amount of US government bonds, it would not only harm Washington, but also be detrimental to Beijing itself.
Selling off US bonds is only the last resort
According to experts, the first problem is that the short-term sell-off of bonds worth 100-200 billion USD will undermine their prices.
In this case, the value of China’s own assets and reserves will decrease significantly, and the proceeds from the sale of the securities also plummet.
The second problem is that the dumping of US Treasury bonds will severely limit Beijing’s ability to control the yuan if the trade war “goes out of control”.
The third problem is that the money received from the sale of US Treasury bonds must be invested somewhere, which in today’s times is not easy, Beijing can hardly find a market. Other finances are safer to invest.
Ultimately, the massive sale of bonds will cause the dollar to collapse, which also does not benefit China.
Beijing has long favored the yuan (Rmb), which is priced lower than its real value, to facilitate an export-oriented economic model, so the weakening of the US dollar will cause exports of China becomes more expensive, reducing its exports to a level that equilibrates with imports.
This means that the US-China trade deficit will be eliminated, which is one of the main goals of US President Donald Trump.
In addition, Beijing also needs to consider the indirect consequences that it will suffer. If this happens, not only China but other countries will also suffer heavy consequences and eventually, the country will suffer.
In the opinion of expert Michael Ross-Johnson, CEO of Chatex Bank – a service of exchanging and storing electronic money – lowering the “pyramid” of US bonds means pushing the whole world into a state of Financial turmoil, much worse than the crisis of 1998 or 2008.
With the above reasons, Beijing leaders understand that selling US bonds is really an extreme measure and can only be used in “desperate situations”, such as a military conflict.
If the situation is not “all to zero”, the Chinese leadership will find other ways to put pressure on Washington.
Leading Chinese economist, Professor Xi Junyang from Shanghai University of Finance and Economics also agreed that the US dollar and Treasury bond waiver process will proceed in phases, China will Gradually reducing the holdings of US public debt to about 800 billion USD under normal conditions.