Are Trump’s Asian bankers about to call in their loans?

PUBLISHED : Sunday, 24 June, 2018, 5:01pm
UPDATED : Sunday, 24 June, 2018, 10:30pm

As Donald Trump throws grenades at the global trading system, investors are caught in the crossfire of tit-for-tat retaliatory steps. China is hitting back. So are Canada, the European Union and even India. But recent moves by Russia may be most ominous of all.

Granted, Moscow is not officially linking its decision to halve its holdings of US treasuries – from US$109 billion in May 2017 to about US$48 billion now – with US tariffs. The selling accelerated in recent months, and the timing is no coincidence. It came as President Trump’s team telegraphed a weaker dollar. It came, too, amid chatter that Beijing, America’s biggest banker, might soon dump Treasuries to strike back.

There are myriad reasons why a politically driven fire sale might backfire. A surge in yields would hurt US consumers, choking a key source of demand for mainland goods. Chaos in markets could throw China’s credit and debt-addicted financial system off balance at the worst possible moment.

As such, President Xi Jinping’s government is slapping taxes on some US$50 billion of US goods, a response to Trump’s hundreds of billions of dollars’ worth of threatened duties. This is a tricky moment for China. Xi doesn’t want to kill his own supply chains.

Don’t interpret rising US Treasury yields as a sign that a crash is coming

What can Beijing do? It could surely block US investment banks access to state-owned enterprise deals, or suspend all Chinese group tours to Trump’s America. It could hit back with exit taxes on goods Apple and Walmart make in China, cancel all Boeing aircraft orders and slap bigger tariffs on Detroit’s cars, Iowa’s agriculture products, Arkansas’s beef or all pharmaceuticals. Then again, doing so might just provoke Trump to toss even bigger grenades at world commerce.

And then there is the “nuclear option” of dumping Treasuries. Dangerous and destabilising as it would be, weaponising debt is still an avenue for Xi’s team to scare Washington. Even the mere threat that Beijing would call Trump’s loans would be a clear and present danger to his only legislative accomplishment – a US$1.5 trillion tax cut that has yet to be paid for.

The paradox is that Trump’s Republican Party is relying on savings from China, Japan, Hong Kong, Taiwan, India and others to finance these cuts. But should Asia? Put aside for a moment that businessman Trump filed for bankruptcy at least four times before entering the White House in January 2017. Forget, too, that Trump, as presidential candidate, talked about defaulting on America’s US$20 trillion debt, Argentina-style, if the burden became too big.

The question is whether Asian central banks want to add exposure to a president whose only consistency is erratic behaviour? Russia’s answer appears to be “no”. China, meanwhile, cut its dollar debt holdings by nearly US$6 billion in April to US$1.18 trillion. That could just be technical fine tuning. But these are the kinds of sales that raise eyebrows in Asia – and tempt smaller dollar holders to front run any about-face in Beijing’s risk tolerance.

For Singapore, South Korea, Thailand and others, there is an obvious first-mover advantage. It is an open question whether that is what Moscow is doing.

Symbolic US Treasury bond yields matter less than the impact of soaring debt levels

On June 19, Bank of Russia Governor Elvira Nabiullina admitted that “we are diversifying” foreign exchange reserves. Yet, she also noted the institution takes geopolitical risks into account along with financial ones. If the escalating tit-for-tat between Trump and Xi isn’t just that, what is?

In 2011, Chinese state-run media including People’s Daily argued that Beijing should “use its ‘financial weapon’ to teach the US a lesson”. The issue then was Washington cosying up to Taiwan. Today it is Trump’s existential threat to China’s economy.

Trump would be wise to avoid giving Beijing reasons to follow Moscow’s lead and pull the trigger.

William Pesek is a Tokyo-based journalist and author. He has written for Bloomberg and Barron’s