U. S. government debt is China’s biggest American import, and its giving China the nuclear option in a trade war.
NEW YORK (Reuters) – It took China just 11 hours to retaliate against the United States for proposing tariffs on some 1,300 Chinese products, but Chinese officials are holding back on taking aim at their largest American import: government debt.
In a tit-for-tat response to the Trump administration’s plan for 25 percent duties on $50 billion of Chinese imports, China hit back with its own list of similar duties on key American imports including soybeans, planes, cars, beef and chemicals. But officials signaled no interest for now in bringing their vast holdings of U. S. Treasuries to the fight.
China held around $1.17 trillion of Treasuries as of the end of January, making it the largest of America’s foreign creditors and the No. 2 overall owner of U. S. government bonds after the Federal Reserve. Any move by China to chop its Treasury portfolio could inflict significant harm on U. S. finances and global investors, driving bond yields higher and making it more costly to finance the federal government.(Graphic: Top U. S. trade partners & foreign holders of Treasuries – reut.rs/2CUqQB0)
Jeffrey Gundlach, the chief executive of DoubleLine Capital LP, said China can use its Treasury holdings as leverage, but only if they keep holding them.
“It is more effective as a threat. If they sell, they have no threat,” said Gundlach, known as Wall Street’s Bond King.
“It would only escalate the situation and eliminate their leverage.”
Prices on benchmark 10-year U. S. Treasury notes slipped on Wednesday, giving back earlier gains on the trade news. Their yield edged up to about 2.81 percent Wednesday afternoon.
China’s Treasury holdings have dipped in recent months, declining by about $30 billion from $1.20 trillion last August, and they are down about 11 percent from their record high above $1.3 trillion in late 2013, according to U. S government data. In all, foreign governments own $4 trillion, or more than a quarter, of the $14.7 trillion in Treasury securities outstanding.
Asked by a reporter on Wednesday if China would reduce its U. S. Treasury holdings in retaliation, Vice Finance Minister Zhu Guangyao reiterated China’s long-standing policy regarding its foreign exchange reserves, saying it is a responsible investor and that it will safeguard their value.
