It’s highly unlikely China would dump US treasuries in a trade war. Yet, the talk surfaces all the time.

Earlier today, China’s vice finance minister dismisses talk of selling US Treasuries in response to tariffs.

China is the largest foreign holder of U.S. debt, which is rapidly mounting amid massive government stimulus programs. Beijing holds $1.17 trillion in Treasury bonds, according to official stats, helping to finance the growing budget deficit. If it were to halt its bond purchases, government interest rates could potentially skyrocket, as well as force borrowing rates up for consumers and companies.

Speculation over the Chinese-owned debt has abounded thanks to some mixed messages. On Tuesday night, Chinese ambassador to the U.S. Cui Tiankai responded to a question on Treasury bond purchases simply by saying that, “If the other side makes a wrong choice, we have no alternative but to fight back.”

But the vice finance minister’s words would appear to put that speculation to rest. “Both in domestic and international law, China is a responsible investor,” Zhu said. “So that’s what Premier Li Keqiang said, the real policy of (the) Chinese government to the U.S. Treasury investment.”

Official Denial

Some might reason, never believe anything until it’s been officially denied. Others wonder, what if?

O.K. So, What If?

Imagine the devaluation of the Yuan if they did it ??

— Daniel Lacalle (@dlacalle_IA) April 4, 2018

I am unconvinced. If China sold treasuries, what precisely would it buy?

Recall that China help stop currency flight by selling US treasuries to support the yuan.

In response, the yuan rose. Actually, the US may welcome China dumping treasuries!

Meanwhile, Trump’s tariff policies and the Chinese response are not good for either US or Chinese consumers.

Such is the nature of silly trade wars.

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