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Speaking at Foreign Correspondents’ Club (FCC), St. Louis Fed President James Bullard talking on Sino-American trade negotiations suggested that China, which is the biggest foreign holder of U.S. Treasuries, it chooses to offload large chunk of Treasuries as part of its trade war with the United States, is not as big a threat to the United States than portrayed.
China’s immense reserve of U.S. treasury bills have always been considered as a formidable weapon which can be engaged and used in these tough times, so, why the Federal Reserve is not worried?
- First of all, if the treasury holdings are indeed a weapon, then it sure is a massive bazooka but with only a few shots, and it sure needs to be fired in extreme cases. Any such action would have serious consequences at least in the short-term affecting transactions across the world, which basically means that it would hurt everyone including China. And, such a move if not coordinated well, it may not be much of firing at all, as other central banks from both advanced and emerging economies would be in the market stabilizing the impact.
- Secondly, one needs to look at the reality or the actual numbers. As of December 2018, China holds $1.123 trillion worth U.S. Treasuries, down $61 billion compared to December 2017, and up $72 billion since President Trump entered the office.
- While China sells, others buy. As China sold $61 billion, Brazil bought $47 billion. The Treasury market is deep, so China would need to sell very big to have the desired impact but doing so, it would see the value of its holdings erode fast.
- It’s not 2008/09. A crisis like 2008/09 would surely come in handy to go far such moves. However, it’s not 2008/09 and China has significantly lost its dominance in the Treasury market, though, its reserves have grown rapidly. During the ‘Great Recession’ China was the single largest holder of Treasury debt with 24 percent share in the entire foreign holdings of U.S. Treasury. In 2019, the next crisis is not here, and the Fed is now the biggest holder of Treasury debt, and China’s share has fallen to 17 percent.
