China sold off the highest level of US Treasurys in nearly 2-1/2 years in March. Meanwhile, there are renewed fears the Chinese could implement its “nuclear options” and sell off even more US debt in retaliation for US trade war tariffs.
China sold $20.45 billion in Treasuries in March. That was the biggest US debt dump by China since October 2016.
After a four-month pause, the big March sell-off resumes a trend of Chinese Treasury divestment we saw in 2018. China shed nearly $50 billion in US Treasurys last year and dumped American debt for five straight months through October 2019. The Chinese currently hold $1.121 in US debt. That’s the lowest level since May 2017.
Overall, foreign investors sold a net $12.53 billion in US government debt in March.
China remains the biggest US creditor. Even a pause in Chinese bond purchases could become problematic for the US as it dumps billions of dollars of Treasurys on the market in order to fund ballooning deficits. The US federal government ran an all-time record deficit of $234 billion in February.
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Even as the Chinese are shedding US Treasurys, they are buying gold. China added gold to its reserves for the fifth straight month in April and appears to be accelerating its rate of purchases.
Bond yields pushed up two weeks ago after a weak 10-year Treasury auction indicated tepid demand for US paper. Rising interest rates mean the US government will have to pay more interest to finance its enormous $22 trillion debt.
This raises another question: could China aggressively dump US bonds to punish the US for raising tariffs in the trade war?
This so-called nuclear option would raise borrowing costs for the cash-strapped US government and likely tank the dollar. The Chinese can’t out-tariff Trump. The US imports far more products than the Chinese. In other words, there is a lot more stuff coming into the US from China than vice versa. But that $1.11 trillion in Treasury holdings does give the Chinese significant leverage.
An editor for the Global Times, a Chinese state-owned newspaper, verbalized this threat in a tweet last week, saying “Many Chinese scholars are discussing the possibility of dumping US Treasuries and how to do it specifically.”
China may stop purchasing US agricultural products and energy, reduce Boeing orders and restrict US service trade with China. Many Chinese scholars are discussing the possibility of dumping US Treasuries and how to do it specifically.
— Hu Xijin 胡锡进 (@HuXijin_GT) May 13, 2019
Most analysts think this is bluster. While a major Chinese dump of US Treasurys would wreak havoc on the US economy, it would also create problems for China. A fire sale on Treasurys would cut into Chinese reserves and potentially destabilize the yuan.
Then again China wouldn’t have to sell everything to have a huge impact on US interest rates. Even dumping a relatively small percentage of its holdings would push rates up, and the debt-fueled US economy has very little tolerance for higher interest rates.
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