On Rumors of a Chinese US Treasury Dump

With US-China trade tensions taking center stage, we guess it was only a matter of time before headlines started pouncing on a corollary: the potential for China to start dumping its holdings of US Treasury bonds as part of its efforts. Not necessarily to hit Uncle Sam where it (supposedly) hurts, but to offset tariffs’ impact on the yuan, which is unofficially pegged to the dollar. Conventional wisdom says tariffs will weaken the yuan and strengthen the dollar—markets’ way of easing the tariffs’ impact on US consumers—potentially goading Chinese counteraction. Accordingly, headlines are starting to warn about the risk of China’s sales making US Treasury markets go haywire—an age-old false fear.

We have written about this numerous times and so won’t belabor the point here—you can check out our past analysis if you prefer more elegant prose. The numbers may be different today, but the reasoning still applies. Here, let us just tackle the issue in handy Q&A bites.

How likely is China to sell all its US Treasury bonds?

No way to know—we haven’t bugged the Communist Party’s central committee’s offices. However, it would be an illogical move, and China’s leadership seems pretty pragmatic to us. If China dumped its holdings in one fell swoop, the yuan would likely shoot through the roof—economic suicide for an export-reliant economy. This runs counter to the government’s long, long record of putting economic stability (which preserves social and political stability) above most every other interest.

How hard would it hurt us if they dumped everything anyway?

Not to be too dismissive, but it probably wouldn’t hurt much at all. Yes, it would temporarily flood the market with US government bonds, which could send long-term interest rates briefly higher (and bond prices lower). But what might seem like catastrophe to the naked eye would likely be a once-in-a-lifetime buying opportunity for the many, many, many investors who covet US bonds. Pension funds, banks, other foreign governments, asset managers and regular old Jane and Jim investing in their retirement portfolio. All would jump at the chance to get the world’s most stable asset and lowest credit risk at a discount, with a yield far above inflation. Their scramble would drive rates back down, likely to where they were before China started dumping. This is just basic supply and demand. Always remember: For every seller, there is a buyer.

But what if they just sold gradually? Wouldn’t that hurt?

History shows it wouldn’t. China gradually sold off a chunk of its US Treasury holdings between mid-2014 and late 2016—10-year US Treasury yields fell for much of this stretch. The 10-year yield also fell between March 2018 and March 2019, as China’s Treasury holdings fell by about $67 billion.^[i] Again, China is just one (big) buyer in a sea of many. The Treasury had no trouble finding buyers when China wasn’t lining up to buy, buy, buy.   

Anything else we should know?

While China is America’s largest international creditor, it is not the largest creditor overall. That honor goes to US investors, along with the Federal Reserve. Second place goes to the US government, through vehicles like Social Security. China owns only 5.1% of total (gross) US public debt. Japan is close behind, at 4.9%.^[ii] Yet when is the last time you heard about the outsized risk of Japanese Treasury bond sales?

If I bookmark this page, will the analysis still be valid in a year or two or five?

Quite likely. The specifics of why China might sell and some of the numbers might change a bit, but the analysis should be evergreen. The shelf life is in the Twinkie realm.