Investment and policy specialists are dismissing fears – stoked further by a September 3 story in Chinese state newspaper Global Times – that China will sharply ramp up selling of its vast quantity of US government bond holdings, as tensions soar between the world’s two biggest economies.
In the recent article, Xi Junyang, a professor at the Shanghai University of Finance and Economics, said Beijing would “gradually decrease” its holdings of US Treasuries to about $800 billion from over $1 trillion “under normal circumstances”. He added that it might “sell all of its US bonds in an extreme case, like a military conflict”.
China is the second-biggest holder of US Treasuries after Japan, with at least $1.074 trillion invested as of June 2020, according to US government data. Experts point out that Beijing has other such holdings via Belgian funds, for instance.
Beijing has gradually trimmed its holdings of Treasuries in recent years. It dumped $106 billion in the first half of 2020 alone, according to the Global Times article. If that number is accurate it would represent the fastest pace of divestment since 2015, said Elliot Hentov, London-based head of policy research at State Street Global Advisors (SSGA).
But he and other investment experts believe a sharper US Treasury sell-off by Beijing will be very unlikely, mostly for practical reasons.
“Where are they going to put their money? They’ve got so much that there isn't anything else liquid enough that they can invest it into,” said Andy Seaman, chief investment officer of London-based Stratton Street Capital.
“While the Chinese and the Russians and other emerging markets would like an alternative [global reserve currency] to the dollar – and that’s years away – there’s not really much of an alternative,” he added.
Even were Beijing to continue selling US public debt, SSGA’s Hentov said such moves are “not a serious threat”.
“Since 2014, foreigners have been consistent net sellers of US Treasuries and there has been a lot of domestic demand to offset that,” he argued. “And that was also before the pandemic sparked massive bond buying by the US Federal Reserve.
“So, there is no credible threat and also no risk of serious market volatility.”
The Treasury market certainly has not registered any real concern. The 10-year US Treasury yield is hovering around the 0.7% mark, as it has done since mid-August. Its last major move was between February 18 and March 10, when it plunged from 1.55% to 0.76% as investors rushed for safety in the face of the Covid-19 pandemic.
Hentov admitted that an “explicit move by China would damage sentiment” but he sees the implications being relatively contained. A decade ago, China’s share of US treasuries was about 16% to 17% of issues outstanding, he estimated. “I would put it at around 5% today.”
Seaman has similar sentiments and pointed to the Federal Reserve’s current appetite to buy debt.
“Let's say, hypothetically, the Chinese did start selling US Treasuries – though I don't think they would – the Fed reaction now would be to hoover them up left, right and centre. So, this is much less of a real threat than some people are making out,” he said.
In an extreme case, were China to sell an enormous quantity of US government bonds, the US could conceivably cancel them, said Gary Smith, founder and managing director of London-based consultancy Sovereign Focus.
“Some have argued that the Fed could just default on the bonds that China wants to sell,” he pointed out. “They would then not hit the market.
"But a US default of this type would signal that there had been a meltdown in relations between the two nations and would have consequences for the credit rating of the US," Smith added.
Like Seaman, Smith is sceptical that Beijing would opt to dump a huge quantity of US debt. “The idea that China will take aggressive action [on US bonds] in order to teach the US a lesson? I just don't buy that,” he said.
“We may get to a point where China's position in US treasuries falls to $800 billion,” added Smith. “But I think that will be an evolutionary move over time that will reflect changing economic fundamentals, and particularly changing use of currency.”
For all the furore presented by the Global Times article, Chinese state media typically targets their domestic audience as much as foreigners, with a view to projecting strength and control – especially at times of national sensitivity or perceived threats. Put in those terms, the recent article is most likely to be a signal of displeasure and a warning – for now, at least.