Growing tensions between the US and China over the handling of the COVID-19 pandemic may finally prompt Beijing to “use its more than $1 trillion hoard” of American Treasuries “as financial leverage against the US”, the website Market Watch reports.
The potential scenario could take place as the US Federal Reserve System is dealing with unprecedented measures amid the ongoing COVID-19 crisis. The Fed had already almost zeroed the key rate and launched a programme of unlimited purchase of government bonds and mortgage-backed securities.
In the first quarter, over two trillion dollars were poured into the national economy to help it stay afloat in the face of the coronavirus pandemic’s impact.
In this context, CNBC cited analysts from Standard Chartered Bank as saying in late May that the Fed could finally take its benchmark funds rate into negative territory in case of a “disappointing economic rebound and exhaustion of other policy options”, something that may be used as a last resort.
The Fed is expected to announce its decision on the key rate on 10 June, with speculation already swirling that a below-zero rate may ultimately result in the dollar's devaluation, which may in turn prompt investors to turn away from relying on the US national currency.
Сhina Reportedly Mulls Slashing ‘Vast Holdings’ of US Treasuries
The Standard Chartered Bank analysts’ remarks came after the newspaper South China Morning Post (SCMP) reported that Beijing may decide to cut “its vast holdings of US Treasury securities” in the next few months in response to bilateral trade tensions and Washington’s accusations of COVID-19 coming from a Chinese biolab.
The newspaper cited unnamed White House sources as saying that in order to tackle the coronavirus fallout, Washington may finally cancel “some or all of the nearly US$1.1 trillion debt that the United States government owes China”.
The SCMP also referred to Cliff Tan, East Asian head of global market research at the Japanese bank MUFG, who called the scenario “such a crazy idea that anyone who has made it should really have their fitness for office reconsidered”.
“We view this as largely a political ploy for [US President Donald Trump’s] re-election and a cynical one because it would destroy the financing of the US federal budget deficit”.
Iris Pang, Greater China chief economist at ING Bank, in turn, suggested that Beijing would try to shun swiftly offloading its US government debt without mulling over other punitive measures against Washington.
More Context: The pie graph leaves out some countries. Here’s the latest data from the US Treasury Department. pic.twitter.com/UlVW6kmt5I— Bad Econ Takes (@BadEconTakes) April 28, 2020
Pang predicted that in the next few months, China may halt its Treasury purchases “to send a clear signal of its intentions; if it decides to do that, it could make actual sales [of its other holdings] at a later date”.
The SCMP noted in this vein that China is able “to spark a crash in the US dollar and financial markets by flooding the market with US Treasuries for sale, which would push down US bond prices and cause yields to spike”.
This scenario, however, “would also ignite a global financial catastrophe, hurting China as well”, according to the newspaper.
The US Treasury Department has, meanwhile, indicated in its report that China’s Treasury holdings plummeted to $1.09 trillion in February from a peak of US$1.32 trillion in November 2013. Beijing is currently the world’s second-largest foreign holder of US Treasuries after Japan, which has $1.26 trillion in US debt.