The recent intensification of President Donald Trump’s hard line on China has included a wide range of policies and proposals that touch everything from student visas to soybean purchases. But most explosive could be the suggestion by some right-wing lawmakers and commentators that the country could choose to default on a portion of the nearly $ 1.1 trillion in US Treasury bonds held by China.
The proposal alarms analysts, who say even harboring the idea is dangerous in an economic environment characterized by a recession caused by a pandemic and a massive increase in the national debt.
Senator Lindsey Graham, RS.C., a close ally of Trump, told Fox News: “They should pay us, not pay us China,” and expressed support for a suggestion by Senator Marsha Blackburn, R-Tenn., that the United States should cancel its sovereign debt held by China.
John Yoo, professor of law at the University of California at Berkeley and visiting scholar at the American Enterprise Institute, said in a item that the United States could “make China pay for COVID-19” by reneging on its commitment to bondholders. “In theory, Washington could even cancel the debt of the Chinese Treasury and we[e] the proceeds of creating a trust fund that would compensate Americans affected by the pandemic, ”he wrote.
While Yoo admitted it would shake up financial markets, others say even this recognition vastly underestimates the scale of the economic calamity it would trigger.
“The challenge behind this concept is that it pushes interest rates and the dollar down, and would cause significant turmoil in the markets.”
“We are the world’s largest debt market for sovereign debt, and the dollar is generally viewed as the world’s reserve currency. The challenge behind this concept is that it drives interest rates and the dollar down and, in general, would cause significant turmoil in the markets, ”said Rob Haworth, senior investment strategist at US Bank Wealth Management. .
“What concerns me is that if we continue to amplify the rhetoric, it will do something even worse for the economy,” said Jamie Cox, managing partner at Harris Financial Group. “We already have enough bad things going on in the economy. We don’t need anything more, ”he said.
“One of America’s great advantages is that we have the cheapest cost of borrowing on the planet. And the main reason we pay our debts, and it’s been a boon to the US taxpayer and the economy, ”said Mark Zandi, chief economist at Moody’s Analytics.
If the United States were to deliberately withdraw from these obligations, this advantage would disappear. “This will mean that all investors will consider the possibility that the US government will get angry with them for some reason… and your obligations will not be paid,” Zandi said. “They’re going to charge a much higher interest rate for taking that risk.”
Jacob Kirkegaard, senior researcher at the Peterson Institute for International Economics, suggested the increasingly belligerent tone was politically motivated.
“The big picture is that this is an integral part of the re-election campaign,” he said, adding that Trump is capitalizing on the growing anti-Chinese sentiment seen in recent polls. “This is one of the few areas where the American public is increasingly unified,” he said.
“No one is happy with the way the Chinese have behaved in trade and international relations, but this strategy that this administration has pursued for three years… is not working. It’s unraveling, ”Zandi said.
In practice, the selective default of Chinese Treasuries might not even be possible to execute. “It may not be as easy as it looks to identify whether the Chinese government holds the bonds. It might not be that simple or even impossible, ”Zandi said.
It would also plunge the entire American financial system into disarray. “US Treasury debt is considered risk-free under our own regulatory framework,” Haworth said.
Experts say that while the White House never takes this any further, raising it as a possibility could prompt investors to re-evaluate Treasuries as the world’s benchmark safe haven. China is a major purchaser of treasury bills, so if the country drastically cut back on buying or selling a significant amount of its existing holdings, the associated drop in demand could push up America’s borrowing costs. .
White House Chief Economic Adviser Larry Kudlow said in a recent Fox Business article maintenance that he didn’t expect China to sell the US debt because he said it would “bankrupt the Chinese government,” he said. But China ready its long-term treasury bill holdings of around $ 36 billion in the first three months of 2020.
“I think they are already getting more careful in their purchases,” Zandi said. “If the Chinese take it seriously, then they will be more cautious buyers,” which could push up borrowing rates and make it more expensive for the Treasury Department to pay off its massive debt.