China's nuclear alternative to dumping US debt will come back

Investors have been worried about how China will repay itself against US tariffs when it runs out of goods to pay taxes. China has many levers to pull, including letting its currency fall, blocking the export of rare earth minerals or even orchestrating boycottes of iPhones and other US goods.

The outbreak in tensions over the past few weeks has also led to speculation that China could reduce its holdings of US debt. The state media in China, the largest holder of US treasuries, reinforced that speculation.

The closely followed Twitter account by Hu Xijin, editor of China's Global Times, earlier this month claimed that "many" Chinese graduates are discussing "the possibility of dumping US government bonds".

However, Beijing is unlikely to armor its vast inventory of US debt because such a dramatic step will probably come back, perhaps poorly. It will destroy China's own financial resources, stupid confidence in the country as a responsible actor and joke global markets. And it's not even clear that dumping Treasuries would have the desired effect of damaging the United States.

"China should not. It is a pointless exercise," said Barry Bannister, Stifel's institutional equity strategy leader.

Such a fire sale would be aimed at damaging the value of US government bonds, thus causing the spike's proceeds. It would be a big deal because the 1[ads1]0-year tax rate serves as a reference for other forms of credit. Borrowing costs on everything from auto loans and mortgage loans to corporate debt will increase.

"It's more possible now than at any time in recent history," said Guy LeBas, chief interest income strategist at Janney Capital Management.

How it might come back

But analysts don not believe that China would actually dump Treasuries in part because it would mean firing in the foot. A fire sale will result in own holdings losing value.

LeBas called it the "rip your nose off" strategy.

"The last thing they want is to damage the value of their remaining holdings," said Michael Hirson, former US Treasury Department chief representative in China. [On]

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