Not that I expect anyone in China to take notice, but it’s always a good idea to try to observe forms:
State Bureau for Letters and Calls 国家信访局
c/o Zhongnanhai Fuyou Street Branch Post Office 中南海府右街邮政支局.
Dear Official Tasked to Handling English Language Correspondence:
Americans often quote the saying of President Theodore Roosevelt, “Speak softly but carry a big stick.” So when Americans see a party engage in what they see as excessively loud and forceful statements, they see it as bluster and a sign of weakness. That is why, for instance, after some Chinese experts were quoted in official media speculating that China could prevent Pelosi’s plane from landing and that didn’t happen, they acted as if China was bluffing (yes, I also saw the Chinese statements that China was playing a longer game and would not make a cheap shot, but the idea of harassing her plane got press attention at the expense of later messaging).
In other words, it is important to make only realistic threats. It was realistic for Chia to impede Pelosi’s flight even though China decided to take other actions.
By contrast, threatening to dump US Treasuries is silly. Publishing it only feeds the idea that China is posturing. From Global Times, which Americans see as an official English-language outlet, in US economy to pay for graduation trip by ‘god of stocks of Capitol Hill’:
With the start of major military drills around the Taiwan island, the mainland has actually started or accelerated the process of reunification, which the US cannot stop. That means China is, in effect, prepared for US intervention. One can only imagine what China will do to eliminate potential risks, including its massive holdings of US treasuries.
China is the second-largest foreign holder of US treasuries, only after Japan. China’s holdings of US treasury securities dropped to $980.8 billion in May, falling below $1 trillion for the first time in 12 years, according to data released by the US Department of the Treasury. The further deterioration of China-US relations will likely have a direct impact on China’s risk appetite for holding US treasuries, and reducing holding of US treasuries could become a precautionary option.
This was the only large scale ultimatum the Global Times story presented and it’s bizarre to see that one mentioned. China and Japan have both been reducing their holdings of US Treasuries in recent years, with no adverse impact to the US government funding or the dollar. Recent US Treasury reports show China’s holdings at $981 billion, down from a peak of $1,316 in November 2013. That current $981 billion represents only 3.2% of total US government debt.
As Chinese-economist Michael Pettis explained in 2018, China Cannot Weaponize Its U.S. Treasury Bonds. His thesis:
A number of recent articles suggest that Chinese officials may reduce their purchases of U.S. government bonds. It is very unlikely that China can do so in any meaningful way because doing so would almost certainly be costly for Beijing. And even if China took this step, it would have either no impact or a positive impact on the U.S. economy.
As we can see, China has reduced its purchases of US government bonds, as has Japan, with no impact on the US.
As Pettis explained:
….the real reason China cannot sell off its holdings of U.S. government bonds is because Chinese purchases were not made to accommodate U.S. needs. Rather, China made these purchases to accommodate a domestic demand deficiency in China: Chinese capital exports are simply the flip side of the country’s current account surplus, and without the former, they could not hold down the currency enough to permit the latter.
To see why any Chinese threat to retaliate against U.S. trade intervention would actually undermine China’s own position in the trade negotiations, consider all the ways in which Beijing can reduce its purchases of U.S. government bonds…
China can buy other U.S. assets, other developed-country assets, other developing-country assets, or domestic assets. No other option is possible.
The first two ways would change nothing for either China or the United States. The second two ways would change nothing for China but would cause the U.S. trade deficit to decline, either in ways that would reduce U.S. unemployment or in ways that would reduce U.S. debt. Finally, the fifth way would also cause the U.S. trade deficit to decline in ways that would likely either reduce U.S. unemployment or reduce U.S. debt; but this would come at the expense of causing the Chinese trade surplus to decline in ways that would either increase Chinese unemployment or increase Chinese debt.
By purchasing fewer U.S. government bonds, in other words, Beijing would leave the United States either unchanged or better off, while doing so would also leave China either unchanged or worse off. This doesn’t strike me as a policy Beijing is likely to pursue hotly, and Washington would certainly not be opposed to it.
Another financial writer explained why China’s exports to the US result in accumulating dollar (or conceivably other foreign) assets:1
Why does China want to run a trade surplus?
China remains an export-depended economy (even though it is currently trying to shift its economic model).
Therefore, it needs to run a current account (or trade) surplus. If it does not, China will face either
more unemployment, for reduced exports mean that the Chinese exporters are forced to lay off workers,
or more debt, as Beijing will encourage large fiscal transfers to the households (social security, unemployment benefits, food stamps, etc.) or the creation of new businesses to mitigate the consequences of unemployment. All this requires more money and, consequently, more debt.
This is why China purchases US Treasuries: to run trade surpluses and avoid higher debt/unemployment — not, as many think, to “help” American consumers so that they can purchase more Chinese imports.
Let’s turn to two channels Pettis mentioned and dismissed: buying developed or developing country assets. Presumably, given the size of the amounts to be deployed, that would mainly be government debt. Even with the dollar very high (as in assets of other countries ex Russia are relatively cheap), it’s hard to see how that would be attractive to China.
For instance, China might make geopolitical waves by buying Japanese government debt. The yen is trading at very low levels and the Japanese central bank has had to buy over half the debt outstanding. But the rest is also held mainly within Japan. Even if China wanted to buy Japanese debt to support Japan (as in make a point about the US failure to do much about its long-standing post financial crisis distress), it’s not clear the market is liquid enough for China to procure all that much. And Japan is very cohesive on the financial institution side. It’s not hard to think that officials would give Japanese firms guidance not to sell Japanese government to the Chinese government or suspected intermediaries. Yet, China could still try to make purchases from non-Japanese firms, but that would likely not amount to much.
Another way to reallocate assets to make a geopolitical point would be to buy Turkish government debt. Turkey is coming close to hyperinflation. China could seek to pry Turkey from the West (which is already threatening Turkey over its increasing economic and military ties to Russia) by helping its finances. But these purchases would have to be seen more as on the order of foreign aid than investment, since the value of the bonds is likely to fall further even with some Chinese purchases.
In other words, this idea of punishing the US by dumping Treasuries may be appealing to a domestic audience, which has long been unhappy about the magnitude of China’s dollar foreign exchange reserves. But no one knowledgeable in the US will lose sleep over it.
We are not alone in pointing out much more acute pressure points, where China could inflict damage on the US at not much economic cost to China. The US has outsourced so many activities to China that it is very vulnerable. We’ve echoed experts in highlighting pharmaceuticals and ascorbic acid.
If China wants to get the US to appreciate that a full-bore conflict with China would be an exercise in severe mutual economic damage, itemizing the critical US drugs that come from China might focus minds here faster than repeating an empty Treasury threat.
1 US share of China’s total exports is falling but not fast enough to change this picture dramatically,