Coronavirus: China could cut US debt holdings in response to White House Covid-19 compensation threats, analysts say
- US news reports suggest White House officials have already considered the idea of cancelling all or part of the US$1.1 trillion debt owed to China
- In response to the debate over the highly unlikely ‘nuclear option’, China could cut its holdings as the US ramps up borrowing to pay coronavirus-related costs
China may move to reduce its vast holdings of US Treasury securities in the coming months in response to a resurgence in trade tensions and a war of words between the world’s two largest economies over the origins and handling of the coronavirus outbreak, analysts said.
US news reports indicated that White House officials have debated several measures to offset the cost of the coronavirus outbreak, including cancelling some or all of the nearly US$1.1 trillion debt that the United States government owes China.
While analysts added that the US was highly unlikely to take the “nuclear option”, the mere fact that the idea has been discussed could well prompt Beijing to seek to insulate itself from the risk by reducing its US government debt holdings.
That, in turn, could spell trouble for the US government bond market at a time when Washington is significantly ramping up new issuance to pay for a series of programmes to combat the pandemic and the economic damage it is causing.
It's such a crazy idea that anyone who has made it should really have their fitness for office reconsidered
“It's such a crazy idea that anyone who has made it should really have their fitness for office reconsidered,” said Cliff Tan, East Asian head of global markets research at MUFG Bank. “We view this as largely a political ploy for [Donald Trump’s] re-election and a cynical one because it would destroy the financing of the US federal budget deficit.”