What if China Dumped U.S. Treasuries

Unload treasuries into a bear market where everyone is fleeing bonds and you create a catastrophic collapse in treasuries and the U.S. dollar. Your currency will soar.
Dump U.S. treasuries in the middle of a crisis and there will be plenty of buyers. Your currency may collapse in value if you aren't swapping those treasuries for a more valuable asset.

Dumping treasuries doesn't make a lot of sense from a Chinese perspective since they would be blamed for the fallout. Global contagion may be inevitable, but putting your fingerprints on it isn't wise. It does make sense as a political maneuver if they fear repayment. It doesn't make sense economically since even if it succeeded, they'd unleash even worse deflation on their economy than is already happening. If they succeeded in pushing the dollar down and U.S. rates up, Germany, Japan, South Korea and other export economies would pancake as the U.S. "wins" the trade war by immediately ending its import of foreign-made consumer goods.

ZH: Former Chinese Central Banker Warns Beijing May Dump Treasuries In Retaliation
Chen Yuan, former deputy governor of the PBOC, said that the U.S.’s labeling of China as a currency manipulator “signifies the trade war is evolving into a financial war and a currency war,” and policy makers must prepare for long-term conflicts.

The U.S. currency-manipulation charge is part of its trade-war strategy, and it’ll impact China “more deeply and extensively” than the trade differences, Chen said Saturday. While China should try to avoid further expanding the disputes, policy makers must be prepared for long-lasting conflict with the U.S. over the currency.

And in a striking warning from the former central banker, he effectively admitted that dumping US Treasurys is certainly a possible retaliation: “The U.S. believes, in a geopolitical point of view, it’s being contained by China with China’s holding of its sovereign bonds,” Chen said,. “That means the U.S. is not completely without weakness.”

He also said that China should work to increase the use of the yuan in global trade such as the purchase of commodities.

Speaking at the same venue - the China Finance 40 meeting in Yichun, Heilongjiang - former PBOC Governor Zhou Xiaochuan said that conflicts with the U.S. could expand from the trade front into other areas, including politics, military and technology. He called for efforts to improve the yuan’s global role to deal with the challenges of a dollar-denominated financial system. Of course, the conflict that is most concerning is the military one. Luckily, that barrier has not been crossed yet, but it is only a matter of time before the US and China clash somewhere in the South China Sea with deadly consequences.

Sure enough, one of the other PBOC officials at the meeting signaled that tensions with the U.S. could increase. Zhu Jun, director of the PBOC’s international department, said “more ensuing measures are likely coming.” She didn’t elaborate.

Finally, ensuing that "more measures are coming", the Communist Party’s flagship newspaper People’s Daily said in a commentary Saturday that the U.S. move is an "appalling" act to gain an advantage during trade negotiations and is doomed to fail.

Oh yes, and speaking of more devaluation - with Citi, JPM and SocGen now expecting the yuan to tumble to 7.35 or lower - Yu Yongding, a researcher at the Chinese Academy of Social Sciences, said in Yichun, said that while markets haven’t reacted too strongly to the weakening yuan this week, it is possible that "the yuan could weaken further on unexpected shocks in the future."

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