China should bail on US bonds even faster, scholar says, as bilateral tensions and anxieties mount
- Though China is already unloading its holdings of US government bonds, a prominent scholar is suggesting it do so at a speedier clip
- Risks associated with investment in Treasuries seen as too high to sustain as bilateral relations grow tense and chances of ‘weaponisation’ increase
China’s investment in US government bonds is fraught with risks, tepid returns and other vulnerabilities – all of which should motivate Beijing to unwind its holdings further and avoid being held “hostage” by Washington’s “exorbitant privileges”, a prominent scholar has said.
“There’s no reason to load up on US Treasuries,” Di said in an article for the April issue of Contemporary International Relations, the journal of state think tank the China Institutes of Contemporary International Relations.
“We have seen how Washington treated Russia’s overseas assets, and its sequestration of German and Japanese assets during World War I and World War II.”
He also said the prevalence of US Treasuries and the US dollar as a medium of international exchange exemplify the country’s “exorbitant privilege”, creating an entrenched global dominance that allows Washington to binge on debt and make gains at the expense of others.
The manufacturing prowess of the world’s second-largest economy makes it easier to reduce its holdings, argued Di, also a researcher with Renmin University’s International Monetary Institute.
Beijing has also grown wary of the US weaponising its financial power, and is making its own pivot to reduce exposure.
Under an earlier export-oriented model, China was a prolific buyer of Treasuries, taking pains to prevent the yuan from appreciating and keep its goods competitive.
But maintaining over a trillion US dollars’ worth of Treasuries also led to years of losses through overseas investment, Di said, especially compared to what American investors were raking in from the Chinese market.
“Part of the Chinese people’s hard-won US dollars flows back to the US through capital circulation.”
“There’s no need, since China has progressed up the value chain and upgraded products from cheap goods to tech-intensive ones, whose export is less sensitive to prices,” Di said.
“A more competitive export sector means the impact from a relatively volatile yuan is manageable, and the yuan can hold up even amid shorting attacks.”