Relax, Chinese-Held US Debt Is Safe

A few days ago, some United States senators proposed penalizing China for withholding information about the novel coronavirus. They also proposed using a portion of China’s central bank reserves in order to offset U.S. debt. According to statistics from the U.S. Department of the Treasury, in February 2020 China held approximately $1.09 trillion in U.S. national debt, making it the second largest holder of U.S. debt after Japan. How safe is it for China to hold U.S. debt? Will it be impacted by the pursuit of so-called “accountability” by American politicians?

It should be said that American politicians are enthusiastic about China holding U.S. debt, as the cost is one that the U.S. itself cannot bear.

If the United States really dares to offset U.S. debt held in China, that would mean defaulting on the bonds. U.S. Treasury bonds are popular in the international market, because they are guaranteed by government credit and the likelihood of defaulting is extremely low. These bonds have long been considered risk-free. U.S. Treasury bonds are also a cornerstone of the hegemony of the U.S. dollar, so its credit issues are critical. Once the credit is damaged, the entire hegemonic dollar system will also be damaged. Throughout U.S. history, the U.S. has maintained a very conservative attitude on defaulting national debts. Over the course of 200+ years, the U.S. has never directly defaulted on national debts. The wording of U.S. politicians’ freeze on the U.S. Treasury bonds that China holds indicates that they obviously do not understand the nature of these bonds.

Aside from U.S. citizens, the main body of investors in U.S. debt is quite extensive. Foreign residents, officials and international institutions hold a total of approximately $7 trillion in U.S. debt. Within this debt, $6.343 trillion are held in long-term bonds and approximately $724 billion are held in short-term bonds. China accounts for 15.5% of all foreign investment in U.S. debt, of which 17.2% is held in long-term bonds and 0.47% in short-term bonds. Once the U.S. moves to default, it will greatly weaken investors’ confidence in the solvency of the U.S. government and in U.S. dollar assets. It will also produce a situation where debt holders compete to sell their holdings, which would be a fatal blow to the U.S. economy. Moreover, the U.S. economy has already been severely impacted by the pandemic. Future economic recovery will, to a large extent, rely on the issuance of Treasury bonds. In order to penalize China, the credit of the entire U.S. Treasury bond system will be severely damaged. Clearly, the loss outweighs the gains.

Additionally, the financial market is quite sensitive to changes. If the market genuinely thinks the U.S. will freeze Chinese-held U.S. Treasury bonds, then some institutions would likely have already begun selling off U.S. debt. However, currently there are no abnormal changes in the international market. Clearly, everyone regards this plan as political grandstanding and does not think it has the potential for practical implementation.

As far as the U.S. Treasury bonds held by China, the main associated risks are still market-related risks including fluctuating exchange rates, interest rates, market risks, etc. However, these risks can all be avoided by means of market management. From the current point of view, U.S. debt remains a relatively liquid and secure asset. We do not need to be influenced by the clamoring of one or two American politicians. Choosing to sell off U.S. Treasury bonds must be decided with the utmost caution; otherwise it could damage China’s own national interests.

China’s buying and selling of national debts is normal market behavior. The U.S. needs to protect the rights and interests of investors and maintain the stability and safety of the financial market. If the U.S. uses its power to arbitrarily harm Chinese assets in the United States, then aside from Chinese countermeasures, the consequences of its actions would only hurt itself.