US-China tariff fight: Will China pull the trigger and dump Treasuries?

  • A Chinese newspaper tied to Beijing suggests that China is studying to sell off its US government bonds.
  • Market analysts believe that China is unlikely to make a move that would damage its own cash, even if they are not & # 39; Not completely lost the threat.
  • Dumping Treasuries are likely to increase borrowing costs for US consumers and businesses, but it will also damage the value of China's own treasury, which is the top $ 1 trillion.

A deeper trade war between the US and China raises questions about what other steps Beijing can take beyond hiking prices on US agricultural, electronic and other goods . One possibility, according to a Chinese newspaper with close ties to the Chinese government: Dump US Treasuries.

Hu Xijin, chief editor of the state-affiliated Global Times, allegedly said in a tweet Monday that Chinese scholars are discussing how such a measure could be implemented without harming the Chinese economy. In theory, it will create Treasury rates lower and send dividends higher. US interest rates will increase, rising costs for US consumers on things like mortgages and auto loans and for businesses looking to raise capital.

Nevertheless, while there has long been concerns that China one day could empty some of its over $ 1 trillion in US government bonds, which reaches about 5% of the total outstanding US debt, says such a policy is unlikely – at least in the short term.

Greg McBride, financial analyst at Bankrate, called the concerns overblown and said that China dumping US bonds "would be so damaging to them as anyone else," he said. That's because China will damage the value of its own US bond holdings by squeezing the money on Treasuries.

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Should China – like flip-flops with Japan as second-largest US debt resident – begin to dump Treasuries, it will also destabilize the global stock market, said Art Hogan, chief market strategist at National Securities Corp. . Other Treasury holders are likely to look after US debt prices have passed.

As the Federal Reserve, China has already reduced its holdings of US government bonds, and can take a long-term approach to continuing to do so, trimming down a five-year timeframe, for example, Hogan said. But if China chose to dump its US government bonds, say between now and the end of the year, then the market is likely to "collapse a little," Hogan said.

In short, self-interest alone would probably deter China from making such a dramatic move, Hogan told CBS MoneyWatch. "When they start selling US government bonds in the open marketplace, they will hold much more than they can sell before they beat down prices, and they won't hurt their cash."

It would be "A daring and aggressive one" of China, but it would be like the Beijing government that is slamming its face, Hogan said.

The price of 10-year government bonds rose on Monday, pushing returns down 2.40% from 2.45%, as investors sought safer assets. On the other hand, US and global stocks were pummeled, with S & P 500 and Dow each falling more than 2% a day, and Nasdaq pushing more than 3%.

China dumping US debt "will probably role and upset stock markets globally, and ironically increase demand for savings assets," said Dan Heckman, national investment consultant at US Wealth Management. This is because such a move would "point to a growing concern for that the trade war is escalating, which is not healthy for global growth advertising. "

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Negotiating tactics?

JJ Kinahan, market democrat in TD Ameritrade, said that the report that China can looking at dumping Treasuries, could only be part of the negotiation tactics, when Beijing and Washington continue to jockey over trade.

Another market analyst agreed but said some signals from Beijing should be taken seriously. "I think this is a classic "throws spaghetti on the wall to see if it sticks" trick, "said Kim Catechis, head of global growth markets at Martin Currie, and while Catechis is not convinced that B eijing intends to sell its holdings of treasuries, he thinks the threat will "resonate and stir up the white house."

Trump administration should not see the possible scenario as an empty threat given that China as an authoritarian state is less retained to domestic policy than the US, Catechis said.

Still, Heckman said if China decided to start selling US government bonds, it would be necessary to redistribute this money elsewhere and the options are near zero. "Germany or Japan are the next safe ports, and if they enter these bond markets, they look at negative returns, depending on where they invest in the yield curve."

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