China dumped more US Treasurys in May, pushing their holdings to the lowest level in two years, according to data released this week by the US Treasury Department.
The Chinese divested themselves of US debt for the third straight month, selling off another $2.8 billion in Treasurys in May. The month before, China dumped $7.5 billion in US bonds and that followed on the heels of the biggest US Treasury selloff by the Chinese in nearly 2 1/2 years in March. Over the last three months alone, the Chinese have shed $20.3 billion in US debt.
After a four-month pause, the big March sell-off resumed a trend of Chinese Treasury divestment we saw in 2018. Over the last 12 months, the Chinese have shed $72.9 billion of its Treasury securities. Chinese holdings of US Treasurys have dropped to $1.110 trillion. The peak was $1.25 trillion in February 2016.
China remains the biggest US creditor. Even a long-term pause in Chinese bond purchases could become problematic for the US as it sells billions of dollars of additional Treasurys in order to fund ballooning deficits.
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So far in fiscal 2019, the US government has already run up a $747.1 budget deficit. Analysts say the deficit will likely top $1 trillion for the fiscal year. The US government has to sell bonds to fund the deficits. If its biggest buyer continues to be a seller, it could create significant problems for the Treasury Department in the near future.
There has even been talk that the Chinese could turn to a “nuclear option” in its trade war with the United States and aggressively sell off its holdings of Treasurys. This would raise borrowing costs for the cash-strapped US government and likely tank the dollar. The Chinese can’t out-tariff Trump. The US imports far more products than the Chinese. But that $1.11 trillion in Treasury holdings gives the Chinese significant leverage.
Most analysts believe it is highly unlikely that the Chinese would resort to the nuclear option because it would also potentially cripple their economy as well. But an editor for the Global Times, a Chinese state-owned newspaper, verbalized the threat in a tweet last month, saying “Many Chinese scholars are discussing the possibility of dumping US Treasuries and how to do it specifically.”
Even as the Chinese are shedding US Treasurys, they are buying gold. China added gold to its reserves for the seventh straight month in June. This is all part of the Chinese government’s “determined diversification” away from the US dollar, and perhaps even to undermine the greenback’s status as the reserve currency.
The Chinese have become more vocal about the need to create alternative payment systems globally that do not rely on the dollar. In an op-ed published last month, a Chinese state-owned newspaper called on the international community to find alternatives to the global dollar system and warned “capricious actions” by the United States government could “ruin the future of the dollar itself.”
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