China has again warned the United States that it may decrease its holdings of US Treasury bonds. In fact, it is a kind of tradition to make such threats against the US when the political situation deteriorates. Nobody was surprised by a new attempt to scare the US especially amid the economic war between the countries.
China is America’s second-largest foreign creditor after Japan. The Chinese authorities are almost sure that their decision to cut its holdings of US Treasury securities may lead to the US financial market collapse. However, most independent analysts have agreed on the fact that the US will hardly suffer from this action. At the same time, China may face significant problems. If China divests itself of 20% or even 50% of US Treasuries, the White House is likely to ignore it. The main reason for that is an extremely large US budget deficit. Thus, in 2020, it reached $3.3 trillion. And even if the Fed issues an additional $200 billion and buys these bonds from the market, the country’s economic condition will remain the same in the short term.
However, if China implements its plan, the consequences will affect both China itself and the US national currency. Thus, the US dollar may lose its status as the main reserve currency because the massive money-printing alienates foreign investors.
