Global Geopolitical Series: Keep an eye on China’s Treasury holdings as trade dispute with U.S. escalates

Within hours after China announced that it would impose retaliatory tariffs on as many as 106 goods originating from the United States including pork and Soybeans in response to President Trump’s announcement of 25 percent tariffs on more than 1300 Chinese goods valued at $50 billion, President Trump signaled that his administration is not here to back down and escalates the trade dispute by ordering officials at his administration to consider tariffs on more Chinese goods worth $100 billion. President Trump has also instructed his Secretary of Agriculture Sonny Perdue to implement a plan to protect U.S. farmers from China’s retaliatory tariffs and U.S. agricultural interests.

While China is in a weaker spot over its $375 trade surplus with the United States and it is difficult for them to win the trade battle, it can inflict severe short term pain to the United States via other means such as reducing its record high Treasury holdings.

We at FxWirePro believe it is important to keep a watchful eye on China’s treasury holdings,

• According to latest report from U.S. Treasury Department, China holds more than $1.5 trillion worth of U.S. securities, of which $194 billion held in equities, $180 billion held in asset backed securities, $3 billion in short term securities, and $1,163 billion held in long-term Treasury securities.

If China chooses to reduce its Treasury holdings or diverse it away, it can cause some serious damage to the United States by pushing the long-term rates higher, which in turn could increase the borrowing cost for the U.S. and U.S. firms.