China should bail on US bonds even faster, scholar says, as bilateral tensions and anxieties mount
China’s investment in US government bonds is fraught with risks, tepid returns and other vulnerabilities – all of which should motivate Beijing to unwind its holdings further and avoid being held “hostage” by Washington’s “exorbitant privileges”, a prominent scholar has said.
Di Dongsheng, vice-dean of Renmin University’s School of International Studies, warned the enormous sums of Chinese assets and capital parked in the US could be “taken hostage” by Washington if Beijing were to step up the defence of its sovereignty and territorial integrity.
“There’s no reason to load up on US Treasuries,” Di said in an article for the April issue of Contemporary International Relations, the journal of state think tank the China Institutes of Contemporary International Relations.
“We have seen how Washington treated Russia’s overseas assets, and its sequestration of German and Japanese assets during World War I and World War II.”
He also said the prevalence of US Treasuries and the US dollar as a medium of international exchange exemplify the country’s “exorbitant privilege”, creating an entrenched global dominance that allows Washington to binge on debt and make gains at the expense of others.
The manufacturing prowess of the world’s second-largest economy makes it easier to reduce its holdings, argued Di, also a researcher with Renmin University’s International Monetary Institute.
Beijing has been steadily dumping US Treasury bills while diversifying its foreign assets, offloading US$22.7 billion in February alone. Its total holdings were US$775 billion at the end of that month according to the US Treasury Department, a far cry from the all-time high of US$1.316 trillion in November 2013.
That reduction is occurring as bilateral ties wane, with the two superpowers engaged in parallel struggles over trade and tech and the West taking steps to disentangle itself from China’s economy.
Beijing has also grown wary of the US weaponising its financial power, and is making its own pivot to reduce exposure.
He said Beijing’s active promotion of the yuan’s use overseas – especially in emerging economies – as well as the creation of the Asia Infrastructure Investment Bank, New Development Bank and Cross-Border Interbank Payment System, have all created new channels for China to withdraw trillions in foreign reserves that would otherwise be controlled by Washington and its allies.
Under an earlier export-oriented model, China was a prolific buyer of Treasuries, taking pains to prevent the yuan from appreciating and keep its goods competitive.
But maintaining over a trillion US dollars’ worth of Treasuries also led to years of losses through overseas investment, Di said, especially compared to what American investors were raking in from the Chinese market.
“Part of the Chinese people’s hard-won US dollars flows back to the US through capital circulation.”
A more competitive export sector means the impact from a relatively volatile yuan is manageable
The analyst also called for more confidence in managing the yuan as China’s exports grow more competitive, questioning the necessity of suppressing the currency’s appreciation through large foreign exchange purchases.
“There’s no need, since China has progressed up the value chain and upgraded products from cheap goods to tech-intensive ones, whose export is less sensitive to prices,” Di said.
“A more competitive export sector means the impact from a relatively volatile yuan is manageable, and the yuan can hold up even amid shorting attacks.”
Citing views from other authorities, including former central bank adviser Yu Yongding, Di concluded that the key to fending off external risks and short seller attacks is decisive control over capital accounts rather than a bulging foreign reserve fund.
