Amid rising tensions, China likely to reduce US debt holdings

By Xie Jun Source: Global Times Published: 2020/9/3 19:18:36

Photo taken on March 3, 2020 shows U.S. dollar banknotes in Washington D.C., the United States.Photo:Xinhua

China may gradually reduce its holdings of US Treasury bonds to about $800 billion from the current level of more than $1 trillion, as the ballooning US federal deficit increases default risks and the Trump administration continues its blistering attack on China, experts said. 

China, the world's second-largest holder of US debts, has been systematically but determinedly trimming its holdings of US bonds in recent years. In the first six months of this year, China dumped about $106 billion worth of US Treasury bonds. On a yearly basis, China's holdings of US bonds dropped by about 3.4 percent as of the end of June. 

"China will gradually decrease its holdings of US debt to about $800billion under normal circumstances. But of course, China might sell all of its US bonds in an extreme case, like a military conflict," Xi Junyang, a professor at the Shanghai University of Finance and Economics, told the Global Times on Thursday. 

One reason for the bond selling is because Beijing is increasingly concerned about the potential risks behind surging debt level in the US, experts said. 

The US Congressional Budget Office said on Wednesday that the amount of debt issued by the US government will amount to about 98 percent of US GDP this year, a level not seen since the end of the World War II — and well above the internationally recognized safety line of 60 percent. The federal deficit is projected to surpass the US economy's size in 2021. 

Zhou Maohua, an analyst at the Everbright Bank, said that although the US has never defaulted on its federal debts, it's unlikely that US Treasury bonds will be dumped in the short term, and holders of those bonds — including China — face increasing default risks in the long term.

"Not defaulting before does not mean it won't default in the future, and risks are accumulating with the ballooning debts and the slumping economic outlook in the US," he told the Global Times on Thursday. 

On the other hand, the rise of US debt amid a great recession will push the US Federal Reserve to cling to very loose monetary policy to stimulate the economy and increase taxes. This will cause returns on the US dollar to edge down, making the assets less attractive to bond holders including China, Zhou said.  

"In the long term, many countries will diversify their foreign exchange reserve assets to decrease reliance on US-dollar assets, as they look to minimize risks caused by higher US debt and its shift to protectionism," he said. 

Xi also noted that China will slash its holdings of US bonds if US moves to sanction the country financially, such as cutting the Chinese mainland or Hong Kong out of the US dollar payment system, or called SWIFT. 

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