Amid rising tensions, China likely to reduce US debt holdings – Global Times

China’s Global Times (GT) once again availed the opportunity to threaten the US policymakers, via an editorial piece, during the late Thursday's trading. The state-backed media targets the US debt holdings amid escalating tension among the world’s top two economies.

Key quotes

China may gradually reduce its holdings of US Treasury bonds to about $800 billion from the current level of more than $1 trillion, as the ballooning US federal deficit increases default risks and the Trump administration continues its blistering attack on China, experts said. 

China, the world's second-largest holder of US debts, has been systematically but determinedly trimming its holdings of US bonds in recent years. In the first six months of this year, China dumped about $106 billion worth of US Treasury bonds. On a yearly basis, China's holdings of US bonds dropped by about 3.4 percent as of the end of June. 

One reason for the bond selling is because Beijing is increasingly concerned about the potential risks behind surging debt level in the US, experts said. 

The US Congressional Budget Office said on Wednesday that the amount of debt issued by the US government will amount to about 98 percent of US GDP this year, a level not seen since the end of the World War II — and well above the internationally recognized safety line of 60 percent. The federal deficit is projected to surpass the US economy's size in 2021. 

On the other hand, the rise of US debt amid a great recession will push the US Federal Reserve to cling to very loose monetary policy to stimulate the economy and increase taxes. This will cause returns on the US dollar to edge down, making the assets less attractive to bond holders including China, Zhou said. 

Xi also noted that China will slash its holdings of US bonds if US moves to sanction the country financially, such as cutting the Chinese mainland or Hong Kong out of the US dollar payment system, or called SWIFT. 

FX implications

With the Wall Street benchmarks already bleeding amid tech routs, news like this adds to the market’s pessimism and weighs on the risk barometers. However, traders may remain cautious ahead of the US Nonfarm Payrolls (NFP), up for publishing later on Friday.