China selling its Treasuries: a warning to Trump?

There has long been speculation over whether China might use its huge portfolio of US Treasuries as a weapon in the (trade) war against the US. The latest data from the US Treasury Department is likely to add fuel to these speculations: Having already sold US Treasuries to the tune of USD 20 billion in March, China went on to sell further T bonds worth USD 10 billion in April. The volume of US Treasuries sold by China in the last twelve months thus amounts to an impressive USD 86 billion. As the chart below shows, this is not the first time China’s portfolio of Treasury bonds has fallen, and the current episode is also unlikely to break any new records. The Chinese had already disposed of US Treasuries in 2016, with the sales volume adding up to an even more impressive 150 billion US dollars. However, there is one crucial difference: in 2016, China’s foreign exchange reserves were on a downward spiral amid government efforts to prevent the CNY from depreciating too quickly. But this has not been the case in the past twelve months and thus signals that the current round of sales has not been prompted by a reduction in reserves. We still doubt whether China is prepared to seriously consider a radical liquidation of its treasury portfolio. The spin-off would be too painful. But the portfolio always comes in handy for China if it wants to fire a warning shot in Washington’s direction.


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