• The Financial District


China may gradually cut its holdings of US Treasury bonds and notes, in the light of rising tensions between Beijing and Washington, state-backed newspaper Global Times quoted experts as saying, Winni Zhou and Andrew Galbraith reported for Reuters on September 5, 2020.

“China will gradually decrease its holdings of US debt to about $800 billion under normal circumstances,” Xi Junyang, a professor at the Shanghai University of Finance and Economics, was quoted as saying on Thursday, without giving a detailed timeframe. “But of course, China might sell all of its US bonds in an extreme case, like a military conflict.”

China, the second largest non-US holder of Treasuries, held $1.074 trillion in June, down from $1.083 trillion the previous month, according to latest official data. It has steadily decreased its holdings of the US bonds this year, although some market watchers suspect China may not have necessarily sold U.S. Treasuries as it may have used other custodians to purchase Treasuries.

Dropping to $800 billion from the current level could mean shrinking its holdings by more than 25%. Analysts say large-scale Chinese selling, often referred to as the “nuclear option,” could trigger turmoil on global financial markets. Another reason the state newspaper cited was the potential default risk in the US as the debt of the world’s largest economy has surged sharply to about the same size of its gross domestic product (GDP), a level not seen since the end of the World War II and well above the internationally recognized safety line of 60%. China is heavily exposed to the U.S. dollar and dollar-denominated assets. Its official foreign exchange reserves stood at $3.154 trillion at the end of July.

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