US debt ceiling crisis gives China more cause to cut Treasury bond exposure, promote yuan as world currency
- US Treasury Secretary Janet Yellen said the country could default by June 1 – raising the spectre of a government shutdown amid ongoing debate over the debt ceiling
- China has already reduced its holdings of US Treasury bonds, which would lose value if the US retained the nation’s debt limit of US$31.4 trillion
Gridlock in Washington over the national debt ceiling will accelerate China cutting its US Treasury bond holdings and its push to use the yuan for foreign trade settlements, especially if the current level of American borrowing stays in place and disrupts the market, analysts say.
They say a decision in the US to retain the nation’s debt limit of US$31.4 trillion would cheapen US government bonds, disrupt the international debt market and even slow the world economy.
“The US failing to raise the debt ceiling would decrease the value of the US Treasury bonds that China holds,” said Denny Roy, a senior fellow at the East-West Centre think tank in Hawaii.
“More generally, it could push the global economy into a recession that would also hurt China.”
Any pullback from bonds or the US dollar would mark China’s latest effort to reduce US exposure since the start of a trade war in 2018.
Whether [the US] will make the debt market volatile and create risk, that possibility is high
It began ratcheting up purchases of US Treasuries in 2000 until 2014, and remains the largest foreign holder after Japan.