One of the more fascinating elements of the Donald Trump presidency has been watching him wage a trade war against China. Which has been a truly baffling saga to observe, given that China is also the largest creditor of the United States treasury.
Now, a recent report out of the Chinese media is suggesting that if Trump doesn’t knock it off soon, China may be prepared to end the western system of finance as we know it.
Because while Trump can slap as many trade tariffs on China as he wants, as I wrote about last year, China has always held the financial nuclear option. Selling its U.S. treasuries holdings.
Which is not to say that’s their first choice. Yet if pushed far enough into a corner, they do own over $1 trillion of U.S. debt. Of course almost by the day, Trump seems to be pushing China into that corner as forcefully as possible, and should China unload that position in any significant fashion, it has the potential to crash the U.S. bond market and drastically alter the global financial landscape.
As the trade war has been reheated over the past week, on Monday Trump implemented his latest round of tariffs, while also issuing what at least sounds like a threat to China via twitter (and yes, I do appreciate the irony of how the global financial markets are now dictated by the latest activity on Donald Trump’s twitter feed).
“I say openly to President Xi & all of my many friends in China that China will be hurt very badly if you don’t make a deal because companies will be forced to leave China for other countries. Too expensive to buy in China. You had a great deal, almost completed, & you backed out!”
Which is not all that new or different from some of the comments he’s made in the past.
However what was rather shocking was what a Chinese journalist suggested is being discussed as China’s response.
Hu Xijin, editor-in-chief of the state-affiliated Global Times, tweeted:
“Many Chinese scholars are discussing the possibility of dumping US Treasuries and how to do it specifically.”
Now in full disclosure, this is a tweet from the Chinese media. Not direct commentary from the Chinese government, or an action that has already been carried out. And I don’t claim to know how accurate that report is in terms of truly reflecting the Chinese government’s internal strategic thinking.
Yet if it does match the actual school of thought within Chinese decision making powers, it should not come as a complete surprise. As after being the biggest lender to the United States, or as Jim Rogers calls it, “the largest debtor nation in the history of the world,” you have to imagine that the Chinese have a breaking point just like everybody else.
Sure enough, according to Zero Hedge, they took the following action in response on Tuesday:
After vowing over the weekend to “never surrender to external pressure”, Beijing has defied President Trump’s demands that it not resort to retaliatory tariffs and announced plans to slap new levies on $60 billion in US goods.
CHINA SAYS TO RAISE TARIFFS ON SOME U.S. GOODS FROM JUNE 1
CHINA SAYS TO RAISE TARIFFS ON $60B OF U.S. GOODS
CHINA SAYS TO RAISE TARIFFS ON 2493 U.S. GOODS TO 25%
CHINA MAY STOP PURCHASING US AGRICULTURAL PRODUCTS:GLOBAL TIMES
CHINA MAY REDUCE BOEING ORDERS: GLOBAL TIMES
CHINA ADDITIONAL TARIFFS DO NOT INCLUDE U.S. CRUDE OIL
CHINA RAISES TARIFF ON U.S. LNG TO 25% EFFECTIVE JUNE 1
CHINA TO RAISE TARIFFS ON IMPORTS OF U.S. RARE EARTHS TO 25%
Again, if accurate as reported, it’s the latest indication that China not only has no intention of backing down, but that they also realize the leverage they hold.
After all, China is the largest lender to the U.S. (perhaps outside of the Federal Reserve’s printing press and the Exchange Stabilization Fund), and it’s the equivalent of giving your bookie the finger after you just lodged yourself in a monumental pile of debt that you have no mathematical way of ever repaying.
Trump also continues to accuse the Chinese of being a currency manipulator. Which in one sense is true. As all of these money-printing central banks are manipulating their currencies lower.
Yet it’s somewhat of a disingenuous comment to make at the same time the Fed can’t even jack interest rates past 2.5%, despite a decade of QE, while now even Trump is calling for a 1% rate cut.
Also of interest is how analysts in China are apparently largely aware of the hypocrisy of some of Trump’s statements.
“Why would you be constantly asking the Fed to lower rates if your economy is not turning weak,” said Mei Xinyu, an analyst at a think tank affiliated with China’s Commerce Ministry.
It strikes me as an incredibly valid question. As it’s the same thing I’ve been wondering myself.
Trump campaigned on a platform that included calling the stock market a “big fat bubble.” Only to later watch the bubble grow even larger, and then point to it as a beacon of economic strength. And as Xinyu astutely points out, if the market is really as healthy and strong as Trump and the Federal Reserve claim it to be, why is there a need to lower interest rates even further? After all, we are more than a decade past the collapse of Lehman Brothers and the sub-prime market.
How it all ultimately plays out will be unparalleled historical theater. It seemed like a bad idea when Trump started the trade war, and now it seems to only be getting ratcheted up even further.
Even if China doesn’t follow through and sell their treasuries, there has already been substantial damage done to both economies. As the people of each country are the ones who ultimately pay the cost of a trade war.
One can only pray that cooler heads will soon prevail. Although if this news is indeed accurate as reported, the coming months and years may well reshape the global financial landscape in a way that most alive today have not yet seen.
Chris Marcus
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