Economist adds voice to calls for China to cut US Treasury holdings to hit back at Trump’s tariffs
Yu Yongding, one of China’s most prominent economists and a former member of the central bank’s monetary policy committee, adds his voice to the chorus calling for a reduction in the country’s hoard of US Treasuries
China, the largest creditor of the United States government, has a tool in its policy arsenal to retaliate against any punitive trade measures imposed by Donald Trump’s administration, although the option should be exercised with caution, said a prominent Chinese economist who used to sit on the central bank’s monetary policy advisory committee.
The comment by Yu Yongding, director of the Institute of World Economics and Politics, and member of the People’s Bank of China committee that sets monetary policy, joins a rising chorus of voices within China’s circle of policymakers to pare back on the country’s US$1.71 trillion in US Treasuries, the largest hoard in the world.
“Some people said reducing China’s holdings of US Treasuries [can be an effective retaliation against] the trade war started by Trump,” Yu said during a financial forum in Beijing. “ While I think it would be a double-edged sword which should be carefully used, I agree that China’s hoard of US Treasuries is too high and should be reduced gradually.”
China’s economy has transformed since the country’s 2001 membership in the World Trade Organisation into the world’s factory. The economy exports more than it imports, running up large trade surpluses against major trading partners that come back to the country in US dollars as foreign exchange reserves. China had the world’s biggest foreign reserves of about US$3.1 trillion as of December, which rose slightly in 2017 because of a 6.7 per cent appreciation of the Chinese currency.
All the foreign exchange earned from exports need to be invested, and US Treasuries offer the most liquid and secure investments for dollar-denominated assets on earth.
The holdings have ballooned, along with China’s economic growth and its rising exchange reserves, to a peak of US$1.3 trillion in 2013. Since then, the Chinese government - advised by the central bank monetary policy committee which Yu sat on - had been reducing its purchases of US Treasury issues to diversify its exposure to dollar assets.
The reduction had to be gradual because China’s government cannot dump its holdings in one fell swoop without depressing prices and turning around to hurt itself, the result of demand and supply which Yu referred to as the “double-edged sword.”
China’s holdings of US bonds, notes and bills fell in November by 1.1 per cent to a four-month low of US$1.18 trillion, according to the US Treasury Department’s January 17 data, the second monthly drop in three months.
China’s creditor status to the US and the large trade surplus it runs up against America had been a subject of friction, and harsh rhetoric on the campaign trail during Trump’s run for presidency.
This week, his administration imposed import tariffs on solar panels and washing machines. While the tax on washing machines, instigated by Whirlpool, have South Korea’s LG and Samsung in their sights, the import duties are likely to hurt Chinese manufacturers, the world’s biggest exporters.
Quotas and punitive duties could also be imposed on other products including steel and aluminium, pending the outcome of investigations by the US Trade Representative’s office. The US Congress is also working to expand coverage of national security to strengthen investment screening of foreign companies, especially from China.
“The old logic of shoring up foreign reserves and using it to back the renminbi when it is under depreciation is a waste of foreign exchange,” Yu said. “Based on effective curbs on cross-border capital flow, it is sufficient for China to have US$1 trillion in foreign reserves, or even lower than that.”
A range of policy tools are available to China for responding to trade confrontation, Yu said.
“China could decrease our trade surplus, or say, our dependence on the US” as a major export market, he said.