As trade tensions between the world’s two largest economies are escalating, some fear China could exercise further retaliation by selling its massive stockpile of U.S. Treasuries (TNX) — an estimated $1 trillion.
But one economist told Yahoo Finance recently that Beijing isn’t likely to take such a drastic measure, at least not just yet. A number of analysts warn that such a move could easily rebound on Beijing.
“If China starts to play around with dumping U.S. Treasuries that would truly be shooting themselves in the head, because that kind of market disruption would hurt their holdings much more than anything else,” William Lee, the Milken Institute’s chief economist, tells Yahoo Finance’s YFi PM.
Given the size of China’s holdings — and the growing tensions with the U.S. — the question has become fodder for market analysts. Many have warned for years that the federal government’s endless deficit financing put the U.S. at risk for a reckoning with its creditors.
Recently, Japan overtook China as the top foreign holder of U.S. Treasury securities, with Beijing having slowly pared down its stockpile of American assets since last year.
According to data from the Treasury Department, Japan’s ownership grew to $1.12 trillion in June, while China’s holdings increased for the first time in four months to $1.11 trillion.
Japan is still a strong U.S. ally, but that’s cold comfort to some worried that China could inflict real damage by selling Treasuries in bulk. But there are good reasons why it’s not that simple, Lee said.
“Because [China] have these huge holdings, they can’t possibly dump all their holdings at once. Because what would they buy -- euros?” he asked.
The U.S. has the largest and deepest bond market in the world, and European debt pales in comparison. That means China’s options for shifting out of dollars are limited.
“So because they can only do a little bit at a time, the large economic and financial market disruptions in asset prices would hurt them much more as holders of U.S. assets,” Lee said.
McKenzie Stratigopoulos is a producer at Yahoo Finance. Follow her on Twitter:@McKenzieBeehler