Global Times: China may sell its holdings of US Treasury bonds as tension with Washington grows

The state-backed Chinese newspaper, Global Times, quoted experts as saying that Beijing may gradually reduce its holdings of US Treasury bonds and notes, in light of the growing tension with Washington.

With the deterioration of relations between China and the United States over several issues including the Coronavirus, trade and technology, financial markets are increasingly concerned about whether China will sell the US government debt it holds as a weapon to counter the growing US pressure.

“China will gradually reduce its holdings of US debt to about 800 billion dollars under normal conditions,” Shi Jin Yang, a professor at Shanghai University of Finance and Economics, was quoted on Thursday as saying, without giving a detailed time frame for that.

“But of course, China might sell all of its American bonds in an extreme case, like the military conflict,” he added.

China, the second-largest non-US holder of US Treasury instruments, held $ 1.074 trillion in instruments in June, down from 1.083 trillion the previous month, according to the latest official data.

China has been steadily reducing its holdings of US bonds since the start of this year, but some market observers suspect that China may not necessarily sell US Treasury instruments as it may use other custodians to buy Treasury bonds.

A reduction to $ 800 billion from the current level could mean a more than 25 percent shrinkage of its holdings. 

Analysts say a large-scale Chinese sell-off, often referred to as the “nuclear option,” could trigger turmoil in global financial markets.

The government newspaper cited another reason for the sale: the potential default risk in the United States, as the debt of the world’s largest economy has risen sharply to about the same size as gross domestic product, a level unprecedented since World War Two and well above the internationally recognized safety line of 60 percent.

China is strongly exposed to the US dollar and its assets. China’s official foreign reserves stood at $ 3.154 trillion at the end of July.