Report has it that China may soon cut its holdings of U.S. Treasury bonds and notes as the tension between both world powers intensifies according to reports gotten from the state-owned Global Times which cites experts as saying.
Over the last couple of years and especially this year 2020, there have been a serious deterioration in the relationships between the U.S. and China over numerous issues among which is the Covid-19 pandemic, trade and technology leading to the global financial markets worrying if China would sell the U.S. government debt it holds as a weapon in order to counter rising pressure from the western power.
“China will gradually decrease its holdings of U.S. debt to about $800 billion under normal circumstances,” Xi Junyang, a professor at the Shanghai University of Finance and Economics, was quoted as saying on Thursday, without giving a detailed timeframe.
“But of course, China might sell all of its U.S. bonds in an extreme case, like a military conflict.”
China meanwhile is the second-largest non-U.S. holder of Treasuries which peaks US$1.074 trillion back in June and down from US$1.083 trillion the previous month based on the latest official data.
The world most populous country had steadily decreased its holdings of the U.S. bonds this year but some market watchers suspects the country may not have necessarily sold U.S. Treasuries as it may have used other custodians to purchase Treasuries.
With the current drop to US$800 million from its current level may suggest the fact that the country is shrinking its holdings by more than 25%and analysts say that large-scale Chinese selling which is often referred to as the “Nuclear option” could further trigger a big turmoil on global financial markets.
There is also the potential default risk in the U.S. as the debt of the world’s largest economy has surged increasingly to about the same size of its gross domestic product which is a level that has not been seen since the end of the World War Two and above the internationally recognized safety line of 60%
China is heavily exposed to the U.S. dollar and dollar-denominated assets. Its official foreign exchange reserves stood at $3.154 trillion at the end of July.
