The possibility that China might stop being the world’s biggest consumer of U.S. debt again reared its imposing head Monday.
Consider it China’s nuclear option in the trade war with the U.S. — the ability to start dumping its massive pile of Treasury bonds that could trigger a surge in interest rates and substantially damage the American economy.
As the two sides engage in a tit-for-tat tariff exchange, the possibility that China might raise the stakes and stop being the world’s biggest consumer of U.S. debt again reared its imposing head Monday.
China currently owns $1.13 trillion in Treasurys, a fraction of the total $22 trillion in U.S. debt outstanding but 17.7% of the various securities held by foreign governments, according to data from the Treasury and the Securities Industry and Financial Markets Association. Should the Chinese decide to walk away or reduce their role in the market, that, at least in theory, could create a substantial dislocation for a country such as the U.S. that relies so much on sovereign entities to buy its paper.
At least for the moment, markets aren’t that worried that China could take such a seemingly drastic step, in large part because the move might not have much upside except to create headlines.
“It’s a self-destructive nuclear option,” said Robert Tipp, chief investment strategist and head of global bonds for PGIM Fixed Income. “Maybe it helps them as a bargaining chip, but it’s endangering the value of something they’re deeply involved in.”
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