uploads///

One Way China Could Twist Trump’s Arm

By

Jun. 22 2018, Updated 7:32 a.m. ET

An economic weapon

There is one economic measure at China’s dispense that could force the Trump administration to back away from its aggressive trade policy. This measure could dangerous, and not just for the United States, but for the global financial system.

This year, US bond (BND) yields rose on January 10 after reports that China (FXI) could be stopping purchases of US government securities. As China is one of the largest purchasers of US government securities (GOVT), a decline in demand from China could lead to an imbalance in US debt markets, especially as the US Treasury is pumping out bonds (AGG) to fund the large fiscal deficit created by the Trump administration’s expansionary fiscal policy.

Article continues below advertisement

Why is China so important for bond markets?

According to the US Treasury, China owns close to 20% ($1.2 trillion) of US debt. China invests its trade surplus with the United States in US bond markets, helping the United States buy more Chinese products. If trade barriers are enacted to limit such purchases, there is a strong possibility that these bond purchases could decline.

Why is this dangerous for global markets?

A decline in buying interest from such a large purchaser could lead to higher bond yields, which could push bond (IVV) prices lower and raise bond market volatility, prompting investor panic and chaos in global markets. In the next part of this series, we’ll discuss another way China could counter US trade tariffs.

Advertisement

More From Market Realist

  • Open sign on a sidewalk
    Macroeconomic Analysis
    Top Reopening Stocks to Play the Shifting Market Sentiment
  • Morgan Stanley sign and stock numbers
    Macroeconomic Analysis
    Morgan Stanley's Buyback Stock Picks in 2021
  • Black Wall Street sign is sign of ethical investing
    Macroeconomic Analysis
    Ethical Investing Stocks and Funds for Your 2021 Portfolio
  • New York City skyline and Goldman Sachs logo
    Macroeconomic Analysis
    Goldman Sachs: Options Trade Picks to Play Earnings Season Volatility
  • CONNECT with Market Realist
  • Link to Facebook
  • Link to Twitter
  • Link to Instagram
  • Link to Email Subscribe
Market Realist Logo
Do Not Sell My Personal Information

© Copyright 2021 Market Realist. Market Realist is a registered trademark. All Rights Reserved. People may receive compensation for some links to products and services on this website. Offers may be subject to change without notice.