China is the biggest lender to the United States. Even though the two superpowers compete, there’s no doubt about an economic symbiosis. Chinese hold $1.2 trillion in U.S. government debt alone, CNN Money reports. But the rate of growth in lending by the Chinese is slowing. And the Chinese government is looking to cut the debt it buys from the U.S Treasury.
China could potentially use cutbacks in U.S. debt purchases as a political tool against trade restrictions on part of the Trump administration. But that would likely backfire. If a sell-off of debt results, that could seriously threaten the global economy. In addition, a sell-off would decrease the value of Chinese holdings.
Treasuries are guaranteed by the United States government and can be redeemed at par value at maturity, but if investors sell them prior to maturity dates, that could result to losses. Even changes in interest rates can depress fixed income values.
“It’s hard to see how China would emerge from this scenario better off,” claimed Mark Williams of Capital Economics.
The U.S. economy is doing quite well know, but recent tax cuts could lead to its overheating. This is a concern expressed recently by William Dudley, NY Federal Reserve President. He believes the central banks should put some brakes in the next few years. Normally, this is done with interest rate decreases. Otherwise, Mr. Dudley thinks, recession will result.