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Macroscope | Should China play hardball in the trade war with Trump and start targeting US Treasuries?
David Brown says the US should be wary of what China chooses to do with its US$1.2 trillion dollars in Treasury securities. Based on the impact of Russia dumping its much smaller holdings earlier this year, a similar move by Beijing could play havoc with the American economy
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They say that all is fair in love and war. There is certainly no love lost between US President Donald Trump and Beijing, with his griping about China’s so-called trade advantage over the United States and his threats to drag the world into a deeper trade war. Maybe Beijing should take the gloves off and play hardball with Washington. After all, it is the sort of political brinkmanship that Trump revels in. It’s time for China to raise the stakes and do some street brawling of its own.
Trump’s trade tactics are already starting to backfire back home with China’s tariff hikes on US exports affecting key voters in America’s farm and rust belts. Now that Trump is committing to compensating farmers and companies who may lose out financially, Beijing has a chance to hit back. Tariff subsidies will intensify strains on the US budget deficit at a time when it is already ballooning, thanks to Trump’s fiscal stimulus programme.
The US budget is so bloated with new tax cut and spending commitments that the deficit is bursting at the seams. So it is not a good time for the US Federal Reserve to be raising interest rates and winding down its massive US$4.3 trillion asset pile created by the Fed’s quantitative easing programme. The upwards pressure on US bond yields exposes a soft underbelly of weakness that Beijing can easily use to its advantage.
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If Beijing wants to tighten the screws on America, this would be the prime opportunity. A buying strike or aggressive dumping of US Treasuries back into the market would pose double trouble for Washington, forcing US bond yields even higher and ramping up US dollar demand in the process. It should give more leverage to Beijing’s tacit devaluation tactics and cause wider scattergun carnage to the US economy at the same time.
Watch: Trade war affects Trump merchandise made in China
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