China's Bond Sales Spark Economic Concerns
14 April 2025 路 Uncategorized 路
Source: 路 https://technews.tw/2025/04/11/china-war-with-us-by-us-treasure-bond/
The yield on U.S. Treasury bonds has surged, prompting President Trump to ease tensions related to his trade war. A potential factor in this recent devaluation of American treasury notes is speculation that China may be selling its holdings. With approximately $760 billion worth of U.S. debt held by China, a large-scale sale could have destabilizing consequences for both economies鈥攁 scenario likened to "tossing a grenade in the room."
U.S. Treasury bonds currently exceed $34 trillion and are projected to reach as high as $50 trillion within ten years. Repayment of this debt relies on national production value; at the end of fiscal year 2024, America鈥檚 debt-to-GDP ratio stood at approximately 98%, just below a critical threshold of 100%. Some experts consider this proximity to that level concerning.
Technically, the U.S. is obligated to pay interest and principal on its debts when due. However, few countries are able to fully repay their debt; for example, Britain still holds war-era bonds dating back to Napoleon鈥檚 time. A sharp rise in bond yields would increase repayment pressure and potentially trigger higher rates鈥攁 double blow to the economy.
As of January 2023, China held $761 billion in U.S. Treasury securities, second only to Japan ($1.08 trillion). The United Kingdom holds around $723 billion, while Taiwan ranks eleventh with approximately $282 billion worth of US debt.
China鈥檚 substantial holdings are linked to its export-oriented growth strategy and the need for a sustained economic expansion supporting a productive workforce. This approach necessitates keeping the Renminbi undervalued relative to the dollar, making Chinese exports more competitive.
When Chinese exporters sell goods in America and receive dollars but require renminbi to pay workers' wages, they exchange their earned U.S. dollars with central banks for local currency; this increases China鈥檚 foreign reserves of USD while preventing domestic market imbalances. The People鈥檚 Bank of China (PBOC) buys excess U.S. dollars from these sellers and provides them the necessary Renminbi.
U.S. Treasury bonds serve as a safe haven in China's forex reserve management strategy, essentially providing loans to America that enable continued purchases of Chinese goods鈥攁 mutually beneficial arrangement.
If the PBOC were to cease intervention, the renminbi would appreciate, making exports more expensive. Mark Williams from Capital Economics believes it is unlikely that China will sell all its U.S. bonds at once due to potential economic losses and the need for alternative investment or consumption channels; he estimates around $3 trillion in USD assets held by Chinese government entities.
If funds were repatriated, the renminbi would appreciate globally, increasing export costs. Williams notes there are limited options available to China regarding how it handles proceeds from such sales.
The U.S., however, has countermeasures: if China announced a sale of US bonds, market yields would likely spike; but the Federal Reserve is expected to intervene with large-scale quantitative easing measures鈥攍owering bond rates as seen in March 2020 when emerging markets' central banks sold off treasuries, causing an increase from 0.5% to 1.2%, and the Fed purchased approximately $1.2 trillion of U.S. bonds.
Market expectations suggest that if China were to sell its holdings without intervention, long-term bond yields could rise by up to 60 basis points (or 0.6%). However, Williams suggests President Trump鈥檚 stance may not align with Federal Reserve policies this time and cautions against such a scenario as "tossing a grenade in the room."
U.S. Treasury bonds currently exceed $34 trillion and are projected to reach as high as $50 trillion within ten years. Repayment of this debt relies on national production value; at the end of fiscal year 2024, America鈥檚 debt-to-GDP ratio stood at approximately 98%, just below a critical threshold of 100%. Some experts consider this proximity to that level concerning.
Technically, the U.S. is obligated to pay interest and principal on its debts when due. However, few countries are able to fully repay their debt; for example, Britain still holds war-era bonds dating back to Napoleon鈥檚 time. A sharp rise in bond yields would increase repayment pressure and potentially trigger higher rates鈥攁 double blow to the economy.
As of January 2023, China held $761 billion in U.S. Treasury securities, second only to Japan ($1.08 trillion). The United Kingdom holds around $723 billion, while Taiwan ranks eleventh with approximately $282 billion worth of US debt.
China鈥檚 substantial holdings are linked to its export-oriented growth strategy and the need for a sustained economic expansion supporting a productive workforce. This approach necessitates keeping the Renminbi undervalued relative to the dollar, making Chinese exports more competitive.
When Chinese exporters sell goods in America and receive dollars but require renminbi to pay workers' wages, they exchange their earned U.S. dollars with central banks for local currency; this increases China鈥檚 foreign reserves of USD while preventing domestic market imbalances. The People鈥檚 Bank of China (PBOC) buys excess U.S. dollars from these sellers and provides them the necessary Renminbi.
U.S. Treasury bonds serve as a safe haven in China's forex reserve management strategy, essentially providing loans to America that enable continued purchases of Chinese goods鈥攁 mutually beneficial arrangement.
If the PBOC were to cease intervention, the renminbi would appreciate, making exports more expensive. Mark Williams from Capital Economics believes it is unlikely that China will sell all its U.S. bonds at once due to potential economic losses and the need for alternative investment or consumption channels; he estimates around $3 trillion in USD assets held by Chinese government entities.
If funds were repatriated, the renminbi would appreciate globally, increasing export costs. Williams notes there are limited options available to China regarding how it handles proceeds from such sales.
The U.S., however, has countermeasures: if China announced a sale of US bonds, market yields would likely spike; but the Federal Reserve is expected to intervene with large-scale quantitative easing measures鈥攍owering bond rates as seen in March 2020 when emerging markets' central banks sold off treasuries, causing an increase from 0.5% to 1.2%, and the Fed purchased approximately $1.2 trillion of U.S. bonds.
Market expectations suggest that if China were to sell its holdings without intervention, long-term bond yields could rise by up to 60 basis points (or 0.6%). However, Williams suggests President Trump鈥檚 stance may not align with Federal Reserve policies this time and cautions against such a scenario as "tossing a grenade in the room."