William Pesek writes:\u00a0 In recent years, China’s relationship with the U.S. has resembled nothing so much as a hostage situation. Beijing’s enormous\u00a0holdings of US treasuries\u00a0\u00a0gave it immense leverage over Washington, which lived in perpetual fear of China choosing to not finance any new debt, or sell off its current holdings.<\/p>\n
Beijing has been trimming its holdings of Treasuries in recent months in order to prop up the yuan. Over the past year, its overall foreign-exchange reserves have fallen by about $315 billion to $3.7 trillion. But the scale of these sales have been relatively modest. And there are at least three reasons that a more massive Chinese selloff of Treasuries is exceedingly unlikely.<\/p>\n
The first reason is\u00a0China’s rickety economy.\u00a0In\u00a0the current economic environment,\u00a0as Chinese\u00a0growth sputters and traders begin to short Shanghai stocks. China needs every growth engine it can muster. And that means enticing U.S. consumers to spend by ensuring their government enjoys low interest rates.<\/p>\n
The second reason China will hesitate to sell off Treasuries is Japan. Beijing knows that if it ends its unique relationship with the U.S., Tokyo would gladly step in to take its place. With about $1.2 trillion of Treasuries, Japan is already only marginally behind China in the dollar-leverage department. And two of Prime Minister Abe’s signature policies are especially relevant in this context: keeping the yen weak and Barack Obama happy.<\/p>\n
If Abe\u2019s economic revival program has experienced any measure of success, it\u2019s because of the yen’s 30 percent drop since late 2012. That\u2019s why Abe will want to make sure the yen doesn\u2019t rise on a trade-weighted basis against the recently devalued yuan. If that means offsetting Chinese dollar sales, then so be it.<\/p>\n
Abe has\u00a0been as compliant a Japanese partner as Washington has encountered in decades.\u00a0 In the wake of a major Chinese selloff, Abe is sure to oblige any request from Washington that Tokyo do something to save the U.S. bond market.<\/p>\n
The third reason that China won’t sell Treasuries is\u00a0there’s nothing else it\u00a0can buy. It turns out the\u00a0Pentagon\u00a0was right in 2012 when it concluded “China has few attractive options for investing the bulk of its large foreign exchange holdings out of U.S. Treasury securities.”<\/p>\n
William Pesek writes:\u00a0 In recent years, China’s relationship with the U.S. has resembled nothing so much as a hostage situation. Beijing’s enormous\u00a0holdings of US treasuries\u00a0\u00a0gave it immense leverage over Washington, which lived in perpetual fear of China choosing to not … Continue reading ![\"China](\"http:\/\/www.w-t-w.org\/en\/wp-content\/uploads\/2015\/09\/China-and-US-Treasuries.jpg\")
<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"