Beijing and Washington can put an end to the trade war is already on 27 March. Despite this, China, the main creditor of the United States, began to actively get rid of investments in U.S. debt. The head of the world’s largest investment company BlackRock Laurence Fink believes that the settlement of the trade conflict will only accelerate this process. Why Beijing is reducing investment in treasuries and whether this will lead to a massive sale?
By the end of last year on the balance sheet of the Chinese Central Bank were US government bonds by 1.12 trillion dollars. That’s 28% percent of the total U.S. debt owned by foreign holders.
Among other major creditors — Japan (owns a debt amounting to 1.03 trillion dollars 25.7 per cent), Brazil (303 billion dollars and 7.5%), Ireland (280 billion dollars — 7%), UK ($273 billion to 6.8%).
In recent years there has been a clear trend, which analysts say: investments in us government debt reduced.
So, only in June last year, the portfolio of Treasury bonds by Japan was down to its lowest level in seven years. Of the thirty largest holders of treasuries have already left Turkey and Russia, have experienced economic pressure from Washington. Moreover, Moscow has sold almost the entire portfolio of these securities.
Of particular concern to China. In 2013, Beijing has been the us debt securities by $ 1.3 trillion. At the end of 2016 — early 2017, the Chinese have reduced these assets to offset the strengthening of the yuan, but then everything was restored. And last year resumed its sale. Thus, in five years, China got rid of the 13.8% of treasuries.
Selling bonds allows Washington to Finance the growing Federal spending, encourage economic growth and maintain low interest rates. Not a loser and China: investment in Treasury bills weaken the yuan against the dollar. As a result, Chinese export costs to Americans cheaper than their own goods.
But enhanced financial dependence on China, which is especially noticeable on the background of the controversies of recent months. The damage unleashed by Washington’s trade war for both countries is already estimated in billions. And Beijing has repeatedly warned that if it goes on, the us debt will have to sell. Solely for economic reasons — to ensure the stability of the yuan.
Now Washington’s to go with Beijing to the world, but analysts are confident that even if a trade agreement is signed, China will continue a policy of non-treasuries.
As noted Laurence Fink, head of the world’s largest private investment company BlackRock, the reason for this may serve as the agreement itself, which is “far from ideal”. China has amassed us debt including due to surplus in mutual trade, said the financier. If Beijing will agree to reduce trade surplus, money to invest in US debt greatly diminished.
“China will continue to reduce purchases of U.S. debt. For the U.S. Treasury — with the growing budget deficit is fraught with very bad consequences. In the end, the Treasury will lose out,” — said Fink.
Why China so much us debt
Maintaining a competitive export prices is an important element of China’s economic strategy. This is achieved through a fixed exchange rate of the yuan against a basket of currencies, the largest share of which falls on the dollar. When the dollar depreciates, Beijing uses the existing reserves of American currency to buy Treasury bonds. The funds the government receives from Chinese companies and those from exports. The purchase of treasuries leads to an increase in demand for the dollar and, as consequence, to its strengthening.
In the hands of China — the largest American creditor — a powerful lever of political and economic pressure on Washington. Periodically Beijing it sets in motion, threatening to run the sale and to derail the US debt market. If the Chinese realize this threat, the Americans will face the instability of the dollar and a slowdown of the economy.
“The economy will start to decline from the generally high interest rates, which will have a powerful slowing effect,” emphasizes Jeff mills, chief investment strategist at U.S. PNC Financial Services Group.
Global demand for the dollar will fall sharply. The collapse of the American currency will hit the international markets harder than the financial crisis of 2008. Everyone will suffer — including the Chinese economy.
Therefore, a more likely scenario is a gradual and orderly sale of the Beijing us government bonds. But for Washington, it’s too bad.
Analysts at Deutsche Bank note: the demand for US debt has been steadily declining, foreign securities dumped these securities on the last four years. And to provide a steady demand for government bonds, the current interest rates may be too low. Will I have to raise them and ruin economic growth to compensate for the additional offer of treasuries with lower demand, is just one of the questions to be answered by the White house, said the head of BlackRock. More importantly, what have to wonder who would be the new buyer of us government debt in the permanent reduction of demand.
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