Wednesday, 19 June 2024 21:46
Wednesday, 19 June 2024 21:46
China may cause the biggest debt crisis in US history
Michalis Psylos • psilosm@naftemporiki.gr
Record in the “selling” of US bonds by China . In the first quarter of this year alone, it sold $53.3 billion in U.S. Treasury bonds, according to the latest data from the U.S. Treasury Department.
The People’s Bank of China has been financing the US trade deficit for years , having become a consistent customer of US debt.
“Having a current account surplus, Beijing has historically funded the US, using those surpluses to buy US Treasuries and other US assets,” market participants told Naftemporiki .
For many years this relationship has been highly beneficial for both: Americans can live beyond their means (importing far more than they export), while China has found a safe and profitable “haven” to place its “excess
savings’ or its current account surplus.
This situation has led China to buy about 1.6 trillion US debt. dollars a few years ago.
Now, however , Beijing has become a net seller of US bonds , which greatly increases the financial fragility of the United States.
Rapid reduction
In recent years, the People’s Bank of China has been rapidly reducing the burden of – among “foreign holders” – US debt.
From 2021 to 2023 the reduction in US Treasuries in China’s hands was over $300 billion. In the last year alone, they fell by more than $100 billion.
For the record, Japan remains the largest “holder” of US Treasury bonds, with nearly 1.2 trillion. dollars .
Today Beijing now holds $767 billion in US Treasuries, the lowest amount since 2009.
However, this amount is still more than enough to put an economy like the United States in a difficult position if China wants to push the button.
And that’s because if the demand for US debt falls, the US will have to close its deficits. But a sharp reduction in the trade and budget deficit would cause a major crisis.
Cracks in the “Empire”
According to Bloomberg, China is also de-dollarizing its reserves as a geopolitical tool to reduce the “power” of the dollar in the global monetary system.
The fear of US sanctions after freezing Russian dollar assets in response to the invasion of Ukraine triggered this pattern for the first time in central banks of countries that are not US allies.
Cracks in the ” dollar empire ” have become one of the most recurring topics of discussion in the markets in recent months.
The decline in the dollar’s share as the world’s reserve currency is real – from 73% in 2000, it has fallen to 57%. The mighty dollar is losing ground to the Chinese yuan or gold on central bank balance sheets.
China is one of the countries that “punish” the “greenback” most violently, selling US Treasuries.
“Can you imagine a scenario in which the US continues to issue trillions in bonds to finance its deficits while
the economy loses momentum and some markets begin to show a greater preference for non-dollar assets?” market players wonder.
“The United States would probably have to significantly raise the yields it pays to be able to balance supply with demand, with the risks that entails.”
Newsessentials Blog 
Posted on June 19, 2024
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