China’s holdings of US Treasury securities have fallen to their lowest level since early 2017 . Is it simply natural attrition as Beijing turns its attention towards domestic matters or could it be an early warning shot across US President-elect Joe Biden’s bows that China will be just as tough if he comes down hard on future trade relations? Biden has it all to prove in terms of finessing trade terms with Beijing, especially with the eye-wateringly high US trade deficit with China showing little evidence of a major turnaround. After nearly four years of damaging trade tensions between the United States and China, a stabilisation of relations is long overdue. The US, China and the global economy need to get back onto a stronger footing and a trade detente seems the best way forward. Beijing has been gradually scaling back holdings of US Treasuries for a number of years. The latest data shows that China’s holdings of US Treasury securities fell to US$1.06 trillion in September, down from a peak of US$1.3 trillion in 2013, still representing a sizeable 15 per cent chunk of US Treasuries held abroad. Of course, the move may be no more than a measure to reduce potential risk exposure, given the surging debt levels in the US. Thanks to the coronavirus crisis, the US budget deficit is ballooning and presenting a massive debt problem for the government. According to OECD (Organisation for Economic Cooperation and Development) projections, in the worst-case scenario of a double-dip recession, the US government debt-to-GDP ratio could surge as high as 140 per cent by next year, compared with 109 per cent at the end of 2019. If Beijing is becoming more anxious about US sovereign credit risks, there are other options to invest China’s official reserves of US$3.266 trillion in. Two main alternatives might be to switch foreign currency holdings out of US dollars and into euros, or buy more gold bullion to bulk up Beijing’s US$118 billion gold reserves. Big US policy changes unlikely as Biden takes over for Trump Either way it could have a significant impact on relative market prices, even if Beijing spreads its portfolio switches over time. If market talk that China might be aiming to scale back its US Treasury investments from US$1 trillion to around US$800 billion proves correct, it would have major consequences for the US dollar/euro exchange rate and for world gold prices. The prices of the euro and gold could go through the roof. Beijing will need to consider its options very carefully. A weaker dollar would translate into a stronger renminbi, raising the price of China’s exports, which may be no bad thing if it helps to correct China’s trade surplus with the US, while keeping a lid on imported price inflation at the same time. A stronger renminbi also helps take the sting out of Washington’s accusations that China was a currency manipulator. More importantly, the euro may be no better a credit risk than the dollar in the long run. The euro has had its fair share of existential risks during the European debt crisis and there are a fistful of countries, like Greece, Italy and Spain, which have runaway government debt/GDP ratios. In Greece’s case, the debt/GDP ratio is already above 200 per cent. When Biden finally assumes office on January 20 next year, finessing relations with China will be high on his list of things to do. While Biden may be looking to build better bridges with Beijing and bring the US-China trade war to a quick conclusion, he will be no easy pushover. Critics will be looking to see whether Biden can make deeper inroads into the US deficit with China. In the last couple of years, there has been some progress with the bilateral deficit falling back to around US$300 billion this year from a US$419bn peak in 2018. The worry is how Beijing is likely to respond, if Biden starts rattling his sabre. Trump’s Pentagon reshuffle is unlikely to raise the China war risk There is the ultimate sanction of a buyer’s strike or a mass dumping of US Treasuries by Beijing, but that’s unlikely to happen. A broad-scale dump of US Treasuries would provoke tougher trade sanctions from Washington, and China could end up exporting fewer goods to the US. In other words, it’s a stand-off. With Biden moving into the White House, it’s time to wipe the slate clean, start talking constructively and making peace over trade. The world is crying out for normality and a return to stronger growth. David Brown is the chief executive of New View Economics