FPI / May 10, 2020
Commentary by Jason Orestes
Anytime China is brought up in mainstream dialogue, the general messaging tends to be as follows: China is an adversary and a problem, we know they lie, break laws, and outright steal from the U.S. and its companies. But we have to play nice because they own so much U.S. debt and fund our spending.
The U.S. is perpetually painted as a helpless giant, unable to get by without China subsidizing our way of life. That fiction is getting exposed as the globalist decoupling from China expands in the wake of the Wuhan coronavirus fallout.
The Trump administration and Republicans are actively considering writing off debt owed to China as part of retribution for the economic destruction unleashed by the coronavirus.
As expected, China is saber rattling in response, threatening to sell their treasuries or not continue to buy U.S. debt in retaliation. The toothlessness of China’s threats will be apparent as it becomes increasingly clear how little they’re actually needed for the U.S. to fund itself, and how limited their options are elsewhere.
The notion that they fund much of our spending is simply inaccurate. China holds a slightly over $1 trillion in U.S. treasuries (second to Japan), which sounds large without context. When you factor in U.S. debt was around $22 trillion before the coronavirus hit, and will balloon by around $4-6 trillion from the coronavirus fiscal impact, they only own about 3.5 – 4% of outstanding U.S. debt.
To better elucidate how relatively insignificant that $1 trillion Chinese debt figure is, it’s also helpful to understand the degree to which the Federal Reserve has been buying treasuries with its Quantitative Easing (QE) programs, and how easily this debt could be effectively monetized if needed.
The Federal Reserve bought around $600 billion of U.S. bonds in one of its post-2008 QE programs about nine years ago. With the Fed’s new faculties to stimulate markets, it bought $1.2 trillion of U.S. bonds in just two weeks from about March 23rd to April 6th 2020. To repeat: the Fed just bought more than the entirety of Chinese-held U.S. debt in two weeks time. If China dared to weaponize the sale of its treasuries, it’s a near certainty the Fed would intervene to smooth it out and place a bid under any sale.
But who will fund the Treasury’s ongoing massive fiscal needs if not the second largest economy in the world? If they don’t buy our new debt issuances, who will?
China’s threat to sell its U.S. treasuries as Trade War stratagem back in 2018 unfazed Steve Mnuchin. The reason? Not only is there significant demand for our debt that will pick up any slack from China eschewing it, but the U.S. is one of the few major, credit-worthy economies actually paying a positive interest rate on its bonds. For everything China is, they’re also pragmatists; they know they’d be shooting themselves in the foot and losing money if they abandoned U.S. debt.
China will trumpet this threat to sell their holdings or abstain from new purchases, and the mainstream media will broadcast it with fear and lecture-laden tones of U.S. submission as if this will kneecap America. The blunt reality is U.S. debt is in high demand throughout the world, and China doesn’t have very favorable alternatives. America has the upper hand, and we would be wise to leverage it as part of China’s much-deserved day of reckoning for the economic and human costs it has exported to the world.
Jason Orestes (@market_noises) is a former Wall Street financial analyst who focuses on contemporary political developments affecting economics, markets, and culture. His work can also be found on financial publication TheStreet and Washington Examiner.