Readers of my blog and followers of my social media have known that I have said that China’s ace in the hole is that they can sell US treasuries to spike US interest rates. China, and Japan, are the largest foreign holders of US treasuries. China also owns debt of many other western nations. They do this not for yield (with reinvestment income from bonds, it makes holding western debt pretty much yielding nothing), but as a weapon. If the People’s Bank of China wanted yield, they would buy their own debt or that of Eastern nations with higher interest rates.
Just this week, China threatened that they may sell US treasuries. I have been speaking about this weapon being used eventually.
Many analysts and pundits on the media are saying that the Chinese would not drop Dollar holdings because they need them for stabilizing the Yuan. I think there are many other ways they can do so without the US Dollar. A currency board for example…or maybe even Gold… both Russia and China are large buyers of Gold. The Russians showcasing a display of this as they sold off the majority of their US treasuries, and using Gold as a way to hedge (Dollar to Ruble decreased, but Gold to Ruble increased meaning they staved off economic sanctions and tariffs.)
However, there are two major reasons why China can sell off Treasuries.
- Trade. If America is going to make it harder for China to trade with America, or even ban some Chinese goods, then there is no need to hold US Dollars. In fact, China does not really import much from America…that is what this trade war is all about (trade deficits). China is holding an excess of dollars required for buying American imports.
Staying on this topic, one of Xi Jinping’s goals was to make Chinese economic growth rely on consumption rather than exports. Where Chinese made goods are consumed by the Chinese rather than being exported. Using the GDP formula of C+I+G+(Ex-Im) or Consumption+ Investment+Government spending + (Exports-Imports), If Chinese exports take a hit, they can overcome it by increasing Consumption…and Government spending if required.
- US Dollars for Oil. China still imports Oil from some Middle Eastern nations, but also from Iran and Russia which take any other currency for Oil. It seems China is doing so with Venezuela as well…Russia and China are stabilizing Venezuela and want Maduro to remain so he will stop accepting US Dollars for Oil. This is part of Russia and China’s goal to attack the US Dollar, and gives them a financial weapon.
As the US Dollar gets stronger, more nations will feel the pinch and will want to buy oil for anything but the Dollar. Again, Turkey, India, South Korea, Japan and Europe are just a few that are doing so already. If the Dollar gets stronger, China will be in the position to dictate terms to Oil importers in regards for accepting anything but US Dollars for Chinese Oil business. As Middle Eastern oil importers market share gets smaller due to countries buying from Iran and Venezuela due to their no US Dollar policy, many nations may be forced to do so just to retain and increase their market share.
Watch the Saudi’s here. Again, this is why they can influence American geopolitical strategy quite heavily and am sure have told America to deal with Iran, who keep stealing Saudi market share.
It is important to note that China has also boycotted American bond auctions… the last 10 year bond auction so primary dealers having to hold on to 32.5% of bonds. The previous months was 19%.
This has now led to the question…who is buying the debt?
Can the Federal Reserve buy up the excess treasuries sold? Yes. But then who will really want to hold the Dollar if the Fed follows the examples of the European Central Bank and the Bank of Japan, both of whom have killed their bond markets by being the only buyer at auctions.
Some will say that the US Dollar being the reserve currency allows them to print dollars to buy debt and not worry about deficits. Precisely. Exorbitant privilege.
This is where Russia and China come in. If they can affect the DEMAND side of the US Dollar, then the Americans can experience inflation due to the excess of dollars now not in demand. For China to be able to sell treasures as a weapon, US Dollar DEMAND has to be taken out first so if the Fed decides to print dollars to buy the debt, they will be punished for it.
This is now why we see a pivot recently by the Americans on Venezuela and Iran. Both are key to Russia and China for their plans to affect US Dollar demand. All to do with oil payments which will damage market share of Middle Eastern producers who will be forced to drop the Dollar if they do not want to see their market share shrink.
I am sure President Trump’s advisors have told him this. I believe this is why US naval ships have been sent to Iran, and there are talks of intervention in Venezuela. If Guaido is installed in Venezuela, he will keep the US Dollar being accepted for Venezuelan oil. Currently, Venezuela oil production has taken a huge hit, where their sales do not threaten market share as of yet, but once production starts coming back online due to Russian and Chinese investment, the Americans may be forced to act.
Regime change is much more difficult to do in Iran. With Saudi pressure, the Americans may be forced to act. They have to in order to ensure hegemony. This is the only way in which President Trump can weaponize the debt held by the Chinese to take away this weapon and advantage China has. If this happens, China will fall to the her knees.