As the US’s biggest foreign creditor, China has in its economic war chest about a trillion dollars’ worth of debt that, in theory, it could dump to do great damage to the US economy.
China keeps buying more US debt (of course)
But the latest data shows that China is in no mood to unload its US debt, at least during the current stage of a trade spat between the two countries.
To the contrary, in February China actually boosted its US Treasuries holdings at the fastest rate in six months, according to data released by the US Treasury Department on Monday.
In the middle of February, the US Department of Commerce suggested imposing heavy trade tariffs on steel and aluminum exporters like China.
Those measures went into effect in March, the first strike of what would become a tit-for-tat trade spat between the world’s two largest economies.
According to the latest data, China remains America’s biggest foreign creditor, and it boosted its holdings of US Treasuries by $8.5 billion to $1.177 trillion in February.
China’s continued accumulation of US Treasuries underscores the country’s demand for US debt.
A large-scale dumping of US debt could cause a collapse in bond prices and a spike in US interest rates: a move that could slow the US, if not the global, economy.
But even as trade tensions rise, analysts have said that it’s unlikely that China will weaponize its large holding of US Treasuries.
“China will only dump US debt in an unlikely scenario when the conflict with US becomes irreconcilable,” Xia Tianran, Senior Macro Analyst at CEBM Group, told Inkstone.
“I think the two governments will reach a compromise and no real damage will be done.”
China buys US Treasuries also for the sake of its own financial stability, as they are considered a safe haven for the country’s huge foreign currency reserves.
“US Treasuries have the highest credit rating and China invests in US treasuries for the high yields and low risk,” Xia said.
It’s little surprise analysts consider dumping US debt to be a double-edged sword for China.