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So the U.S.
China trade dispute is essentially about
fairness. The U.S.
has long complained that they're not treated
fairly by the Chinese that it costs too much to
send American products into China.
And along with that the US does not charge enough
for Chinese products that come into the US.
Now this has been a topic of conversation for a
long time it's gone through multiple presidents,
through administrations, through many Congresses.
The thing is, nobody's ever really done very much
about it.
There have been a few measures here and
there, some tariffs on Chinese
products when they've tried to dump certain
products into the U.S.
but nothing as strenuous and nothing as concrete
and nothing as serious as what the Trump
administration has done with the tariffs
that it's leveled against Chinese goods.
Now of course the Chinese have countered with
their own tariffs but their retaliatory measures
are somewhat limited in scope.
So the Chinese basically have three ways that they
can retaliate against American tariffs.
One of course is that they can level their own
tariffs and they have done that.
Number two is that they can make it more
difficult for U.S.
companies to operate in China.
Of course the big one that comes to mind there is
Apple. It could really make Apple's life
miserable through a whole host of measures.
The third thing that they can do, and this is
what we call the nuclear option, is that they can
either stop buying U.S.
Treasuries or they can actually start selling
U.S. Treasuries back into the market.
Now the reason why this is such an important
thing and why we call it the nuclear option is
because China is the largest holder in the world
of US debt.
It's got over a trillion dollars, close to $1.1
trillion dollars in U.S.
bonds, notes, bills, those those sort of things.
And the U.S.
counts on China to buy up its debt.
Of course that's very important with the U.S.
running nearly trillion dollar deficits which are
expected to continue as far as the eye can see.
So if China is not a big player in that market it
could make life very difficult for the U.S..
The idea of China going to the nuclear option is
something that's been framed in the local media
there, which of course is its state-run media,
where they've talked about scholars studying this
issue.
Now that's a very calculated type of language
where they say, 'OK we're just going to study
this. We're going to look at this.'
It's basically saber rattling, is what it really
comes down to.
They want the US to know that this is something
that's on the table.
Everybody knows that the chances of China doing
this aren't really good.
But as the dispute goes on and if the dispute
continues to go on, which it's likely to do, it
becomes more and more of a possibility where
China has to say look we can't match you dollar
for dollar tariff wise. That's
the big thing for them, because the U.S.
obviously imports far more goods from China than
the other way around.
So if this continues to go on, if the stakes get
higher, if feelings continue to get hurt, it
becomes more and more of a viable possibility for
China to step in and stop buying U.S.
Treasuries or sell them outright.
The big thing for China is that if it does take
this type of nuclear option it will not go
unscathed, if it does something like
that. Because, look, China needs to hold U.S.
Treasuries.
They're still the most liquid instrument in the
world as far as fixed income goes.
They have they carry a pretty decent yield on
them. It also would weaken the U.S.
dollar, which would make U.S.
multinationals stronger.
And it would just generally cause a crisis of
confidence within the world that China is
stepping away from this market.
So there is damage that could be done significant
damage to the Chinese economy if it would step
away from the market.
Now of course that doesn't mean they won't do it.
China is under a different political system than
the U.S.
President Trump and Congress, they have to answer
to the American people.
The way the Chinese government, the way their
political system is set up, President Xi does not
have to answer on the same level that President
Trump does. So they can go ahead and they can
sustain a little bit of
damage. Of course, China's economy is still a
very strongly growing economy.
So they have a little bit of wiggle room here,
but not a whole lot.
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Why China's US debt holdings Are Its 'Nuclear Option' In Trump's Trade War

123 Folder Collection
Julia Kuo published on July 10, 2019
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