ON September 3, a Chinese Communist Party newspaper reported that China is ‘likely’ to sell about one-fifth of its US Treasury holdings.
This would put downward pressure on the value of the dollar and force the US Federal Reserve to raise interest rates (to attract holders of the dollar), at the cost of economic growth, because businesses are discouraged from borrowing.
Some commentators interpreted this as a declaration of economic war – an economic war that the US should pre-empt. And indeed, the US has since banned more Chinese products.
A US-China economic war affects Britain more than most. Britain is the third-largest holder of US Treasuries and counts the US as its largest national trading partner. Britain is a net exporter to the US. By contrast, it is a net importer from the EU. A falling dollar would curb British exports, as they become more expensive.
Imports from America would become cheaper, to the benefit of consumers, but Britain’s continuing de facto membership of the EU discriminates against American goods. The British government still has not reached its long-promised free trade deal with the US.
The chances decline if a Democratic Party President or Congress is elected in November. Recent British moves to renegotiate the EU Withdrawal Agreement have prompted Democratic Party leaders to declare that they would prevent any free trade deal.
Their nominal excuse is that the British focus on removing the clauses that keep Northern Ireland entailed to the EU would imperil peace in Ireland. This is nonsense, but doesn’t change American politics.
The current Democratic Party is pro-EU, anti-Conservative, and pro-China. President Barack Obama said before the referendum in 2016 that Britain would go to the back of the queue for free trade with the US if it left the EU. His Vice-President, and now Presidential candidate, Joe Biden, would make good on that promise.
An economic war is not clearly in China’s interests. Selling Treasuries would make Chinese exports more expensive, and China has long depended on export-led growth. China’s trade surplus with the US is worth $25billion to $35billion per month.
Moreover, selling US Treasuries would yield US cash, while causing a decline in the value of the dollar. China could exchange the cash, but then foreign countries gain more control of the dollar. And once China has lost its dollars, it loses its leverage. The conventional wisdom is that China would not dump US Treasuries.
On the other hand, China proved this summer that it would accept export losses in order to economically punish states such as Australia for standing up to China over its lies on Covid and its belligerence in the region.
The Communist Party newspaper implies that China is willing to harm itself in order to harm the US. The paper offered two reasons for dumping Treasuries ‘as the ballooning US federal deficit increases default risks and the Trump administration continues its blistering attack on China’.
China dumped more than $100billion in the first six months of this year. The newspaper promises a dump twice as large. This is a signal: ‘Look what we’re prepared to do when we don’t need to. Be aware of how far we would go.’ The paper quotes a local professor’s opinion that China would sell all US bonds in the event of war or US financial retaliation.
Some Americans are urging the Trump administration to ‘strike first’ and ‘hard’ economically. The main recommendation is ‘decoupling’, meaning returning manufacturing back to America.
This has already begun: Trump has imposed tariffs on some Chinese exports and prohibited technical co-operation with certain companies, such as Huawei. And China’s Covid diplomacy, prioritising medical supplies to compliant states, has pushed the US, Australia, Britain, and other states to less dependency on Chinese goods.
On September 10, Trump again promised more decoupling. And on Monday this week, his administration banned products primarily sourced from the Xinjiang region, such as cotton, given that about a million Uyghurs are used as forced labour there. The administration warned that more bans are coming.
The next three largest Treasuries holders collectively possess as much value as China – Britain, Ireland, and any of Luxembourg, Brazil, or Hong Kong, varying on any given day because of closely-valued holdings. None of these countries is intent on economic war.
In theory, China could expropriate Hong Kong’s holdings, for a total value ahead of Japan, but practically this is impossible. The holdings are not materials that Chinese agents could physically move back to the mainland.
China could co-opt its client states through its imperialistic belt-and-road programmes, but these states tend to hold few Treasuries. Altogether, other foreign countries carry six times as much value as China. This means that China holds 15 per cent of US Treasuries. These Treasuries are not the only form of US national debt, of which China owns about four per cent.
While we don’t control China’s behaviour, we do contribute to the problem. The West keeps running up debt, which is then sold to foreigners, who then have influence on Western economies.
America’s public national debt ballooned since 2008, due to long wars, the banking crisis, and increasing welfare entitlements, most notably through the Affordable Care Act.
The debt now stands close to $23trillion. Servicing the debt costs more than $400billion per year. Britain’s public debt has just reached a record value in absolute terms – more than £2trillion – beyond the size of the whole economy. This has happened otherwise only after wars. The US public debt will surpass the size of its economy in 2021.
The West needs to live within its means. However, Westerners have little hope of seeing such economies if Britain’s only Conservative Party doesn’t rediscover conservatism, and if America’s newly ‘democratic socialist’ Democratic Party sweeps the White House and Congress in November.