Author Topic: Should We Worry about China Dumping U.S. Treasuries?  (Read 2249 times)

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Should We Worry about China Dumping U.S. Treasuries?
« on: August 14, 2017, 12:00:37 PM »
Should We Worry about China Dumping U.S. Treasuries?
March 31, 2017
Zane E. Brown

https://www.lordabbett.com/en/perspectives/fixedincomeinsights/should-we-worry-china-dumping-us-treasuries.html

Trade and geopolitical tensions have spurred investor concerns that China may unload all or part of its holdings of U.S. Treasuries totaling $1.1 trillion.

In Brief

    Trade and geopolitical tensions between China and the United States have raised concerns that China may sell all or part of its massive holdings of U.S. Treasury securities in response to developments that Beijing considers unfavorable to it.

    A large-scale disposal of Treasuries by China could lead to negative economic and market consequences worldwide, spurred by a spike in U.S. interest rates and a big drop in the U.S. dollar.

    It seems likely, though, that if the selling process were to lead to financial instability, the U.S. Federal Reserve (Fed) could emerge as a buyer of Treasuries to calm markets.

    If China were to sell its $1.1 trillion of Treasuries in retaliation for pressure from Washington to balance its trade surplus, for example, the effect may be the opposite of what Beijing intends.

    Why? For China, selling Treasuries—and the U.S. currency it receives as proceeds—could actually lead to the undesirable outcomes of weakening the U.S. dollar and strengthening the yuan (thereby making Chinese exports more expensive).

    Meanwhile, China has become less critical to U.S. Treasury financing, as Beijing’s role as a large-scale purchaser of Treasuries has diminished somewhat over the past several years.

    The key takeaway—Analysis suggests that investor fears over China’s holdings may not be realized, and even if they were, and the Fed took mitigating action, the consequences likely would be less severe than initially believed.

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