Contact us
CALL US NOW 1-888-GOLD-160
(1-888-465-3160)

China Signals It May Dump More US Debt

  by    0   1

The Chinese are threatening to dump US Treasuries even as the federal government borrows money at a torrid rate. If the Chinese were to follow through, it could wreak havoc on the bond market and send interest rates surging despite the Federal Reserve’s best efforts to hold them down.

The fiscal 2020 US budget deficit surged past $3 trillion in August. And Congress is considering more spending. Treasury Secretary Steve Mnuchin recently  called for more fiscal stimulus and said  “now is not the time to worry about shrinking the deficit.”

Meanwhile, the Chinese have slowly been divesting themselves of US Treasuries over the last several years. At the peak, China held about 1.32 trillion in US debt. That has fallen to about $1.07 trillion as of the last Treasury International Capital data report. Between June 2019 and June 2020, the Chinese divested themselves of  $38 billion in US debt.

Even with the recent selloff, the Chinese still ranks as the second biggest holder of US debt, only behind Japan.

But according to a recent article published by the Global Times, China could further reduce its holding to around $800 billion as America’s “federal deficit increases default risks and the Trump administration continues its blistering attack on China.”

The Global Times is owned by the People’s Daily, an official publication of the Chinese Communist Party.

According to the Times report, “One reason for the bond selling is because Beijing is increasingly concerned about the potential risks behind surging debt level in the US.”

A professor at the Shanghai University of Finance and Economics told the Global Times that the Chinese government could dump even more US Treasuries in an extreme situation.

China will gradually decrease its holdings of US debt to about $800 billion under normal circumstances. But of course, China might sell all of its US bonds in an extreme case, like a military conflict.”

An analyst at the Everbright Bank told the Global Times that while there has never been a real threat of the US defaulting on its debt in the past, many fear an increasing risk of US default in the longterm.

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.”

A rapid selloff of US debt by the Chinese would upend global financial markets and send bond rates upward. This would be a nightmare for a US government already trying to sell trillions in Treasuries to cover its massive budget shortfall. But even a slow Treasury dump by the Chinese could be problematic. It would mean a greater supply of Treasuries on the open market even as the US Treasury Department tries to issue new bonds. There is only so much demand for US Treasuries. If the Chinese aren’t buying, and are in fact selling, who is going to buy all of this debt?

Supply and demand dynamics would push bond prices lower and interest rates up. In order to hold interest rates down, the Federal Reserve would almost certainly have to take up the slack. This would mean even more quantitative easing, more money printing and more inflation.

Most analysts think Chinese threats to dump US Treasuries are nothing but bluster. While a major 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 over a longer period of time would push rates up without more Fed intervention, and the debt-fueled US economy has very little tolerance for higher interest rates. On the other hand, there isn’t much tolerance for more inflation either.

Get Peter Schiff’s key gold headlines in your inbox every week – click here – for a free subscription to his exclusive weekly email updates.
Interested in learning how to buy gold and buy silver?
Call 1-888-GOLD-160 and speak with a Precious Metals Specialist today!

Related Posts

Silver Demand Expected to Exceed 1 Billion Ounces in 2021

Every key area of silver demand is forecast to rise in 2021, according to the Silver Institute’s Interim Silver Market Review. The institute projects silver demand will come in at 1.029 billion ounces this year. That would mark the first year demand has exceeded 1 billion ounces since 2015.

READ MORE →

Jerome Powell 2.0

President Joe Biden has tapped Jerome Powell to serve a second term as chairman of the Federal Reserve. Biden said Powell’s “steady leadership” helped calm markets as governments shut down the economy due to coronavirus, and he expressed confidence in Powell’s future leadership. “I believe Jay is the right person to see us through,” Biden […]

READ MORE →

The Fed Pulled Off a Masterful Manipulation of the Junk Bond Market

The Federal Reserve pulled off a magnificent manipulation of the junk bond market, facilitated a massive wealth transfer from savers to speculators, pocketed millions of dollars, and then washed its hands of the matter. In March 2020, as governments shut down the economy for coronavirus, the Fed slashed interest rates and launched a massive quantitative […]

READ MORE →

Poland Plans to Add Another 100 Tons of Gold to Its Reserves

During a recent interview, Bank of Poland President Adam Glapiński said the central bank plans to add 100 tons of gold to its reserves in 2022. In 2018, the National Bank of Poland began aggressively adding gold to its reserves. Through the first half of 2019, the Polish central bank added more than 100 tons of […]

READ MORE →

The Fed’s Artificially Low Interest Rates Are Eating Away at Social Security

The Federal Reserve has held interest rates artificially low for decades. This causes all kinds of distortions and misallocations in the economy. And it’s creating quite a problem for the Social Security Administration.

READ MORE →

About The Author

Michael Maharrey is the managing editor of the SchiffGold blog, and the host of the Friday Gold Wrap Podcast and It's Your Dime interview series.
View all posts by

Comments are closed.

Call Now