Amid the Sino-U.S. tensions China might reduce US debt holdings

Koyna Mitra 8th September, 2020

China reduces its US debt holdings as US debt rises to match its GDP (Source: Reuters)

According to Global Times, China—which currently holds more than $1 lakh crores worth of US treasuries, might gradually reduce it to about $80 thousand crores owing to the Sino-U.S. tensions.

Global Times cited that China has been systematically reducing its holdings of the US bonds in recent years and has given up about $10.6 thousand crores worth of US Treasury bonds in the first six months of this year.

Xi Junyang, a professor at the Shanghai University of Finance and Economics said to Global Times that under normal circumstances, China might decrease its holdings of US debt to about $80 thousand crores, but in an extreme case, like a military conflict, China might sell all of its US bonds.

As reported by Reuters, China held US bonds worth $1.083 lakh crores in May and reduced it to $1.074 lakh crores by the end of June. By dropping its debt holdings to $8 crores, China will shrink its holdings by more than 25 per cent. Analysts say that such a large scale selling often referred to as the ‘nuclear option’, could bring about turmoil in global financial markets.

Official Chinese experts told the Global Times that one of the reasons for selling the bond being Beijing’s growing concerns about the potential risks behind the surging debt levels in the US. The US Congressional Budget Office said that the amount of debt issued by the US government has surged sharply and will amount to be about 98 per cent of the US GDP. This level is well above the internationally recognised safety line of 60 per cent and has not been in sight since the end of World War II.

Zhou Maohua, an analyst at the Everbright Bank, told the Global Times that the US Federal Reserve, amid the rising debt would, cling to loose monetary policies to stimulate the economy and increase taxes. This would reduce the returns on the US dollar and make the US assets look less attractive to bondholders such as China. He added that in the long term, many countries will try to get a hold of varied foreign exchange reserve assets in order to decrease their reliance on US-dollar assets as they want to minimise risks caused by higher US debt.

(Sources: Global Times, Reuters, The Economic Times)

Edited by Swikruti Kar