ILLUSTRATION. China could gradually cut its holdings of US bonds and notes or US Treasury.
Source: Reuters | Editor: Khomarul Hidayat
KONTAN.CO.ID – SHANGHAI. China could gradually cut its holdings of US bonds and notes or US Treasury. This is in light of the increasing tensions between Beijing and Washington.
Chinese newspaper, Global Times which is quoted Reuters reported, with Sino-US relations deteriorating due to issues including the coronavirus, trade and technology, global financial markets are increasingly concerned that China will sell off its US Treasury holdings as a weapon to counter mounting US pressure.
“China will gradually reduce its holdings of the US Treasury to about US $ 800 billion under normal circumstances,” said Xi Junyang, a professor at Shanghai University of Finance and Economics without providing a detailed time frame.
“But of course, China might sell all of its US bonds in an extreme case, such as a military conflict,” he added.
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China, the second largest US Treasury holder, currently held US $ 1.074 trillion as of June 2020, down from US $ 1.083 trillion the previous month, according to the latest official data.
China has continued to lower its holdings of US Treasuries this year, although some market observers suspect China may not necessarily sell off US Treasuries because it may have used other custodians to buy US Treasuries.
If CHIn’s holdings in the US Treasury fell to US $ 800 billion from current levels, that would mean shrinking its holdings by more than 25%.
Analysts said a massive sell-off in China, which is often referred to as a “nuclear option” and could trigger turmoil in global financial markets.
Another reason China will cut US Treasury holdings, according to a Global Times report, is the potential risk of default in the United States as debt in the world’s largest economy soars to a size nearly the same as gross domestic product (GDP). The US debt level is predicted to be well above the internationally recognized security line of 60%.
China is highly exposed to the US dollar and dollar-denominated assets. China’s foreign exchange reserves were recorded at US $ 3.154 trillion at the end of July 2020.
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