Relations between China and the United States continue to worsen. Beijing intends to toughly respond to the US sanctions. The Chinese would sell 20% of their trillion US dollar portfolio of Treasury bonds. The consequences of such a move are unpredictable.
If we look at it from the side of politics, then everything is not so terrible. However, for the American financial markets, this could be a disaster.
China has been looking for ways to defend itself against the US pressure for a long time. But the latest threats from Washington to distress the Chinese assets in America have ticked off Beijing. China now intends to damage the US economy by cutting its US Treasury portfolio by about 20% (to $800 billion).
However, some American experts believe that selling 20% or even 50% of the Chinese portfolio will not be a disaster for the White House. The US budget deficit for 2020 will be $3.3 trillion. Even if the Fed has to print an additional $200 billion to buy from the market the bonds that the Chinese will dump, nothing will change in the short term.
However, everything is much more interesting.
The US dollar is the world's main currency. And its dominance is caused by two factors. Firstly, the American currency is in great demand outside the United States. Secondly, the United States is purposely destroying those politicians (sometimes together with their countries) who are trying to follow the path of de-dollarization of their foreign trade relations. One of the significant sources of demand for the US dollar are central banks and finance ministries of other countries, which need the US dollar reserves in order to maintain the confidence of their citizens and foreign investors in their own national currencies. In other words, countries wishing to have a stable currency were literally forced to lend to the US budget, and not always on favorable terms.
Thus, by selling off American bonds from its foreign exchange reserves, China will not only put pressure on the US economy, but may become a revolutionist of the existing world financial system. China will be able to function without American bonds due to its gold and foreign exchange reserves. This means that the largest global economy and the main player in the international trade has got rid of the US dollar dependence. This is precisely the major problem for the United States.
Moreover, China has all chances to become a new "financial pole" in the world, which is gradually moving away from a total focus on the American currency. On September 1, China opened access for foreign investors to its domestic bond market. The Chinese yuan is becoming more international. In addition, Yves Bonzon, a chief investment officer of the Swiss bank Julius Baer, believes that China's economic model and its growing influence on the global economy require strategic investments in the Chinese stocks and bonds.
China's government bond market has become one of the largest in the world and is therefore included in a growing number of leading bond indices. This, in turn, contributes to liquidity and transparency.
Soon, most of the financial flows will be redirected to China. And the financial privileges will go to China instead of the United States. The process has just begun and will take years, but the prospect terrifies Washington. Therefore, such leaders of the United States as Donald Trump and Joe Biden are showing great readiness to destroy China, economically and literally, before the US dollar's dominance around the world comes to an end. Washington's problem is that this ambition will not be enough to maintain American financial hegemony.