China may ditch US Treasuries as decoupling risk looms: Global Times
- Beijing may gradually decrease its holdings of US Treasury bonds if tensions with Washington continue to escalate, reports the state-backed Global Times
- The sharp weakening of the US dollar amid historically low interest rates will make China more willing to sell its US debt, experts say
China could gradually cut its holdings of US Treasury securities by about 20 per cent to US$800 billion, the state-backed Global Times reported on Friday, as Beijing continues to weigh options to insulate itself from tensions with Washington.
China does not release data on the value of its US federal government bonds, but the latest figures from the US Department of the Treasury showed it held US$1.074 trillion worth at the end of June, making it America’s second largest foreign creditor after Japan.
China’s Development Research Centre, a think-tank under the State Council, said this week it was possible Washington might seize China’s holdings of US government securities if the bilateral relationship devolves into a full-on confrontation.
But of course, China might sell all of its US bonds in an extreme case, like a military conflict
Xi Junyang, a professor at the Shanghai University of Finance and Economics, was quoted as saying by the Global Times that China will “gradually decrease its holdings of US debt to about US$800 billion under normal circumstances”.
“But of course, China might sell all of its US bonds in an extreme case, like a military conflict,” he said.
Many analysts have said this so-called nuclear option is highly unlikely because it could hurt China as much as the US. But Beijing has been steadily decreasing its holdings of US government debt.
In June, China sold US$9.3 billion in US treasury bonds, according to US Treasury data. In a 12-month period, China’s holdings have dropped 3.5 per cent.
The share of dollar assets in China’s foreign exchange reserves dropped to 58 per cent at the end of 2015 from 79 per cent in 1995, according to the latest official data.
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China’s total foreign exchange reserves stood at US$3.15 trillion at the end of July, according to the State Administration of Foreign Exchange.
The Russian central bank has cut US Treasuries holdings to zero from US$175 billion in 2011.
“Beijing has clearly learned from Russia’s experience and countermeasure strategies,” Sima said.
Russia also established the System for Transfer of Financial Messages, the equivalent of the US-dominated SWIFT financial transfer system, after the US imposed sanctions on Russian banks and threatened to cut it from the SWIFT system following its annexation of Crimea in 2014.
Angus To, deputy head of research at ICBC International, said the sharp weakening of the US dollar amid historically low interest rates would make China more willing to sell its US Treasuries.
To said he expected further depreciation in the US dollar because of the government’s huge stimulus package to fight the coronavirus pandemic, which continues to drag on the economy.
The US Congressional Budget Office said on Wednesday the amount of debt issued by the government will amount to about 98 per cent of US gross domestic product this year, a level not seen since the end of World War II – and well above the internationally recognised safety limit of 60 per cent.
The federal deficit is projected to surpass the total size of the US economy next year.
“In general, China’s holdings of US Treasuries are falling,” To said. “We believe the fall in China’s holding of US Treasuries is primarily due to the slower pace of foreign reserves accumulation and portfolio diversification.”
