China has a $1 trillion trade war weapon. Will it ever use it?

Certainly, in the trade war between the United States and China, it has been a week of rapid escalation. Beijing devalued the yuan after the Trump administration threatened to apply tariffs to almost all Chinese exports. The United States then called China “currency manipulator”, deepening the crack.

In this way, one could say that exchanges have shaken the world markets and threaten the global economy. What happens next is an unknown. For its part, China has indicated that it is prepared to fight, if necessary. And he has an enormously powerful weapon under his sleeve: he is the largest creditor of the US government.

Thus, it has been said that, in theory, Beijing could trigger a panic in the bond markets.

Latent panic

Undoubtedly, it is considered that Beijing could trigger a panic in the bond markets. This, instantly getting rid of some of the $ 1.1 billion in US Treasury bonds it owns.

Now, it is important to indicate that, when launching an avalanche of US Treasury bonds, the price would collapse, which would result in an increase in yields (or interest rates) and thus cause an increase in costs of the US loans.

In addition, China has taken steps in recent days to shore up the yuan, noting that depreciation was a warning signal. But President Donald Trump could still strike back, even if the administration sticks to his plan for more business talks in September. It is clearly established as a combustible situation that is ripe for further climbing. That’s where the concern for US bond holdings in China comes into play.

If China really wants to shake the United States, according to thought, it could destroy the value of the US Treasury bonds by pushing them to the market.

That would cause an increase in yields. And given that Treasury yields serve as a benchmark for commercial and consumer credit, the price of corporate debt, mortgages and car loans would increase, slowing economic growth in the United States. The dollar could also suffer as the alarm spreads.

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Source: Julia Horowitz | CNN Business