Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. China has steadily accumulated U. Treasury securities over the last few decades. As the trade war between the two economies escalates, leaders on both sides seek additional financial arsenal. Some analysts and investors fear China could dump these Treasurys in retaliation and that this weaponization of its holdings would send interest rates higher , potentially hurting economic growth.
This article discusses the business behind the continuous Chinese buying of U. China is primarily a manufacturing hub and an export-driven economy. Trade data from the U. Census Bureau shows that China has been running a big trade surplus with the U. Chinese exporters receive U.
It buys the available excess U. PBOC can print yuan as needed. China hence accumulates USD as forex reserves. International trading which involves two currencies has a self-correcting mechanism. Assume Australia is running a current account deficit i.
The other countries which are sending goods to Australia are getting paid Australian dollars AUD , so there is a huge supply of AUD in the international market, leading the AUD to depreciate in value against other currencies.
However, this decline in AUD will make Australian exports cheaper and imports costlier. Gradually, Australia will start exporting more and importing less, due to its lower-valued currency.
This will ultimately reverse the initial scenario scenario 1 above. This is the self-correcting mechanism that occurs in the international trade and forex markets regularly, with little or no intervention from any authority.
If the PBOC stops interfering—in the previously described manner—the RMB would self-correct and appreciate in value, thus making Chinese exports costlier. It would lead to a major crisis of unemployment due to the loss of export business. China wants to keep its goods competitive in the international markets, and that cannot happen if the RMB appreciates. However, this leads to a huge pileup of USD as forex reserves for China.
Though other labor-intensive, export-driven countries such as India carry out similar measures, they do so only to a limited extent. One of the major challenges resulting from the approach that's been outlined is that it leads to high inflation. China has tight, state-dominated control on its economy and is able to manage inflation through other measures like subsidies and price controls.
Like the U. The euro forms the second biggest tranche of Chinese forex reserves. China needs to invest such huge stockpiles to earn at least the risk-free rate. With trillions of U. Treasury securities to offer the safest investment destination for Chinese forex reserves.
Multiple other investment destinations are available. With euro stockpiles, China can consider investing in European debt. Possibly, even U. However, China acknowledges that the stability and safety of investment take priority over everything else. Though the Eurozone has been in existence for around 18 years now, it still remains unstable.
It is not even certain whether the Eurozone and Euro will continue to exist in the mid-to-long term. An asset swap U. Other asset classes like real estate, stocks, and other countries' treasuries are far riskier compared to U. Forex reserve money is not spare cash to be gambled away in risky securities for want of higher returns.
Another option for China is to use the dollars elsewhere. For example, the dollars can be used to pay Middle East countries for oil supplies. However, those countries too will need to invest the dollars they receive. Effectively, owing to the acceptance of the dollar as the international trade currency, any dollar supply eventually resides in the forex reserve of a nation, or in the safest investment—U.
Treasury securities. One more reason for China to continuously buy U. Treasurys is the gigantic size of the U. Buying U. That would cause a spike in borrowing costs for the U.
Also, because Treasury yields are a benchmark for U. Beijing uses its Treasury holdings as a key tool to stabilize the yuan within a targeted range, against the dollar in particular. Some critics have alleged China uses Treasuries and its other currency reserves to hold down the yuan, making its exports more attractive. At the same time, allowing the currency to cheapen too much risks other problems, such as foreign capital flight.
Any sharp depreciation in the greenback might force Beijing to defend the yuan, which may mean shedding more of its Treasuries stake. Lastly, any knock-on effect in the U. Business News Updated. There's a long, kind of simmering underneath of nationalistic feelings. Treasury yields actually moved lower during Monday's stock market panic selling despite more chatter of a China bond market retaliation. A tweet from Hu Xijin, editor in chief of the state-run Global Times, noted that "Chinese scholars are discussing the possibility of dumping US Treasuries and how to do it specifically.
Whether they are willing to endure the pain — I think they might, but not to a great extent. I think it will be more a threat than an actual tool or strategy. Stocks endured their worst day of the year Monday as fears continued to boil that a resolution was not on the horizon.
A failed China trade deal has been among the market's worst worries since President Donald Trump took office. A lack of a deal could threaten a U. Skip Navigation. Key Points.
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