China, holding Treasuries, keeps ‘nuclear option’ in US trade war

NEW YORK: It took China just 11 hours to retaliate against the United States for proposing tariffs on some 1,300 Chinese products, but Chinese officials are holding back on taking aim at their largest American import: government debt.

In a tit-for-tat response to the Trump administration’s plan for 25 per cent duties on US$50 billion of Chinese imports, China hit back with its own list of similar duties on key American imports including soybeans, planes, cars, beef and chemicals.

But officials signalled no interest for now in bringing their vast holdings of US Treasuries to the fight.

China held around US$ 1.17 trillion of Treasuries as of the end of January, making it the largest of America’s foreign creditors and the No. 2 overall owner of US government bonds after the Federal Reserve.

Any move by China to chop its Treasury portfolio could inflict significant harm on US finances and global investors, driving bond yields higher and making it more costly to finance the federal government.

Jeffrey Gundlach, the chief executive of DoubleLine Capital LP, said China can use its Treasury holdings as leverage, but only if they keep holding them.

“It is more effective as a threat. If they sell, they have no threat,” said Gundlach, known as Wall Street’s Bond King.

“It would only escalate the situation and eliminate their leverage.”

Prices on benchmark 10-year US Treasury notes slipped on Wednesday, giving back earlier gains on the trade news. Their yield edged up to about 2.81 per cent Wednesday afternoon.

China’s Treasury holdings have dipped in recent months, declining by about US$30 billion from US$1.20 trillion last August, and they are down about 11 per cent from their record high above US$1.3 trillion in late 2013, according to U.S government data. In all, foreign governments own US$ 4 trillion, or more than a quarter, of the US$14.7 trillion in Treasury securities outstanding.

Asked by a reporter on Wednesday if China would reduce its US Treasury holdings in retaliation, vice finance minister Zhu Guangyao reiterated China’s long-standing policy regarding its foreign exchange reserves, saying it is a responsible investor and that it will safeguard their value. — Reuters