The Chinese are threatening to dump US Treasuries even as the federal government borrows money at a torrid rate. If the Chinese were to follow through, it could wreak havoc on the bond market and send interest rates surging despite the Federal Reserve’s best efforts to hold them down.
The fiscal 2020 US budget deficit surged past $3 trillion in August. And Congress is considering more spending. Treasury Secretary Steve Mnuchin recently called for more fiscal stimulus and said “now is not the time to worry about shrinking the deficit.”
Meanwhile, the Chinese have slowly been divesting themselves of US Treasuries over the last several years. At the peak, China held about 1.32 trillion in US debt.
That has fallen to about $1.07 trillion as of the last Treasury International Capital data report. Between June 2019 and June 2020, the Chinese divested themselves of $38 billion in US debt.
Even with the recent selloff, the Chinese still ranks as the second biggest holder of US debt, only behind Japan.
But according to a recent article published by the Global Times, China could further reduce its holding to around $800 billion as America’s “federal deficit increases default risks and the Trump administration continues its blistering attack on China.”
The Global Times is owned by the People’s Daily, an official publication of the Chinese Communist Party.