In the ongoing trade war between China and the United States, the $1.1 trillion that the U.S. owes China is often perceived as a source of leverage. However, according to The Economist, China’s collection of bonds may backfire if used against the United States.
China could plausibly dump its US dollar bonds into the United States, which would prompt a fiscal crisis in the country. In order to keep its currency undervalued, China has been purchasing American dollars since the early 2000s. Although it now holds other foreign currencies as well, China official holdings of American debt grew to $1.3 trillion in 2013.
However, if China were to dump US treasuries into the market, it is not clear that it would have the intended effect on the American economy. The United States enjoys a prominent role in global finance, meaning that countries typically buy American debt in times of economic uncertainty. Therefore, the instability caused by such Chinese bond sales might just result in other countries soaking up the new Treasury supply.
In addition, if China were to sell its U.S. bonds, its own yuan would rise and subsequently hurt its own exporters and play right into Trump’s plans. Moreover, there is no comparable replacement option for China to attempt to swap its U.S. treasuries for another foreign currency.
It is unclear whether either China or the United States understands the significance of its position in the global financial system. For China to challenge America, it would have to exhibit more open markets, financial transparency, and rule of law, all difficult under the current Communist authoritarian regime. On the other hand, the United States posturing as a “protectionist bully” does not bode well in the long term either.