Amid the rise in trade tensions between the US and China, a media furore has flared over whether China will dump US Treasury holdings or ‘weaponise’ the renminbi. The speculation has been nurtured by bellicose statements from both sides, Russian sales of some of its Treasury holdings, and the recent publication of Treasury data showing a modest decline in Chinese Treasury holdings.
The debate is entertaining, but for both substantive and technical reasons it misses the mark. In spite of much rumour and conjecture, in the past China has consistently neither acted to ‘dump’ or ‘weaponise’ its Treasuries, nor shown interest in doing so.
And for good reason. Any abrupt or visible Chinese effort to sell off its $1.1tn-plus in Treasury holdings would set off considerable volatility in global financial markets.
Instability is anathema to Chinese leaders and portfolio managers. It is contrary to their self-interest. A sell-off could ratchet up US Treasury yields, imposing massive capital losses on Chinese official dollar holdings.
Large Treasury sales would have unpredictable consequences. Would China return the dollars home and sharply bid up the renminbi? Or would instability cause an upsurge in angst in China and around the world, resulting in major downward pressure on the currency?
Over a period of more than a year, Beijing has consistently resisted downward renminbi pressure against the dollar. The authorities have used means ranging from modest intervention – including through actions at the daily renminbi fixing, and combating short-sellers on the money markets – as well as public statements supporting currency stability. Previous OMFIF commentaries have noted that there is no case to assert China ‘manipulates’ the renminbi or has engaged in ‘competitive devaluation’.
That reality stays unchanged.
China recognises that a falling renminbi would offset the impact of US tariffs on Chinese exports and exacerbate tensions with Washington as trade negotiations proceed. Additionally, the Chinese authorities have been apprehensive that a declining renminbi, particularly close to, and especially beyond, Rmb7 per dollar, might trigger destabilising capital outflows.
What would China do with the dollar proceeds? Assuming it would not bring the money home, which is unlikely given the currency market implications, China could place some funds elsewhere – Australia, Canada, Europe (though there is no pooled European safe asset, and Germany is shrinking the supply of its own government bonds). But, aside from the US, no other global capital market is sufficiently deep that it could absorb such a large of stock of funds without disruption, let alone while affording essential liquidity.
On the technical front, there has been much hyperbole about the Treasury International Capital data for March, with the major foreign holders of Treasury securities table showing a roughly $10bn decline in Chinese holdings. The March decline is relatively small, and the Chinese level is not that different from November and December.
Also, there may be explanations for the decline unconnected to fundamental changes in portfolio management. Treasury holdings could be shifted to custodial accounts in Belgium or Luxembourg, for example, and not get picked up by the TIC data. Perhaps given lower US yields, China placed maturing Treasuries into US agency or corporate bonds or other dollar assets to pick up some return. Perhaps some Treasuries were liquidated to finance modest intervention to support the renminbi. These are matters that would be visible to the Chinese authorities, but not the public.
It is worth recalling that while US Treasury 10-year bonds yielded around 3.3% last autumn, they are returning 2.4%. Even if China were intent on gradually reducing its Treasury holdings, many others appear to be buying them – despite surging supply due to the US’s ill-conceived expansionary fiscal deficits.
Especially at a time of tension with the US, China will wish to uphold financial stability. Stories about China dumping Treasuries and acting to weaken the renminbi appear, as at many times in the past, vastly overblown.
Mark Sobel is US Chairman of OMFIF.