For all this talk of RU and China dumping UST like their holdings are going to zero
1. Russia isn't even in the top 30 (what they hold is negligible)
2. China UST holdings still outweigh the rest of the planet (as far as foreign holders of UST are concerned) pic.twitter.com/23UPSFa7T4
— ℭhi 🛢️ (@chigrl) November 18, 2018
In September, China’s share of US Treasuries holdings had the highest decline since January as ongoing trade tensions with Washington forced the world’s biggest economy to take measures to stabilize its national currency.
Still the biggest foreign holder of the US foreign debt, China slashed it’s share to $1.15 trillion from nearly $1.17 trillion in August, according to the latest data from the Treasury Department. The fall marks the fourth straight month of declines. China is followed by Japan, whose share of US Treasuries fell to $1.03 trillion, the lowest since October 2011.
Washington has accelerated the Treasury issuance to avoid potential growth in the federal deficit due to the massive tax cut pushed by President Donald Trump, as well the federal spending deal approved by the government in February.
China has incurred the largest debt buildup in recorded economic history—and the prognosis is not good. The International Monetary Fund surveyed five-year credit booms near the size of China’s and found that essentially all such cases ended in major growth slowdowns and half also collapsed into financial crises.
A 50 percent chance of a financial crisis for the world’s second-largest economy would represent one of the greatest threats to the global economy.
Can China avoid a crisis? Both bears and bulls make equally compelling arguments about China’s current challenges, suggesting the probability of a major crisis is in line with the historic precedent of 50/50.
Bears warn that Beijing is juggling too many challenges at once while growth drops, making a crisis more likely.
Beijing risks making a misstep as it attempts to manage seven economic policy challenges at once:
1. Slow deleveraging: While credit growth has moderated to come in line with economic growth, debt-to-gross domestic product (GDP) ratios remain high and steady.
2. Persistent financial risk: Financial regulatory overhaul continues, but new shadowy corners pop up as soon as old ones get regulated, while property prices remain elevated.
3. Monetary/external imbalance: The strategy of using monetary liquidity to support the financial system amid regulatory tightening is running headlong into Federal Reserve tightening, weakening the renminbi and retesting capital controls.
4. Geopolitics: Even before the Trump presidency, China and the United States were poised to become competitors as China climbs the value chain and offers an alternative model. For a country as large as China, the middle-income trap is harder because it also leads to a Thucydides Trap (the pattern of established powers fearing rising powers, historically leading to conflict three-quarters of the time and likely to strain China’s integration with Western economies).
5. Social contract: Convincing people to accept lower growth and higher default risk will be difficult.
6. Attracting foreign investors: Convincing international investors to use the renminbi and invest in China requires a credible commitment to avoid capital controls.
7. Sectoral restructuring: It will take decades to rebalance the economy toward domestic consumption, services, and advanced manufacturing, reform state-owned enterprises, and deepen capital markets.
China faces this array of challenges while its sustainable growth rate is falling by half, from a 10 percent average over four decades to a new normal around the 5 percent middle-income average.