Since the beginning of this year, China has once again sold $97.5 billion in U.S. bonds, which has aroused dissatisfaction and concern among some people in the United States. They have even shouted slogans calling for the confiscation or cancellation of China's holdings of U.S. debt. So, if the United States does take such action, what kind of situation will we face?
China's sell-off of U.S. bonds is motivated by self-interest. China's U.S. debt has been maintained for seven consecutive months, as China needs to optimize the structure of its foreign exchange reserves, reduce the proportion of U.S. debt in foreign exchange reserves, and stabilize the RMB exchange rate. In addition, China continues to increase its holdings. At present, China's ** reserves have reached 2,226 tons, showing that China's ** strength for US bonds is relatively large.
However, even if China's behavior has caused dissatisfaction with the United States, the United States cannot actually directly cancel China's holdings of U.S. bonds. U.S. bonds are a financial product, not just an IOU. If the U.S. chooses to unilaterally disapprove the U.S. debt held by a particular country, the entire U.S. bond market could be in danger of collapsing. After all, U.S. bonds are investments in the trading market, and it is impossible to invalidate only the U.S. bonds held by a certain country.
In the face of China's sell-off, the most likely course for the US is to continue issuing more Treasury bonds to cover the previous shortfall until no one in the US bond market is willing to buy them. At present, the size of the U.S. debt has reached 33$93 trillion and is expected to exceed $34 trillion in the near future. The expectation that the Fed will pause interest rate hikes and possibly cut them next year will further increase liquidity in the market, potentially leading to a record size of U.S. bonds by 2025.
In addition to China's sell-off, the global trend towards "de-dollarization" is also one of the factors contributing to the increasing risk of default on US bonds. Central banks are less willing to buy U.S. bonds, and more countries are seeking to diversify their foreign exchange reserves to reduce their dependence on the U.S. dollar. This trend is undoubtedly a challenge for the United States that cannot be ignored.
According to the latest data, the current debt-to-GDP ratio of the United States has climbed to 133%, and the interest payment of US Treasury bonds next year may approach one trillion dollars. If the world continues to "de-dollarize", the United States may face a more difficult financial environment. As a result, the United States** needs to take steps to address this challenge, such as continuing to issue debt to meet growing fiscal needs.
As the second largest overseas creditor of US bonds, China should pay close attention to US policy changes and be prepared accordingly in the face of the possibility of US defaults. Against this backdrop, China has adjusted its foreign exchange reserve structure and reduced its exposure to U.S. bonds by selling U.S. bonds and increasing its holdings.
At the same time, China should also strengthen cooperation with other countries to promote the reform and stability of the global multilateral financial system and reduce its over-dependence on the US dollar. By strengthening international cooperation and exchanges, China can increase the trust of other countries in the renminbi and further enhance the internationalization of the renminbi.
Personally, I think China needs to be prudent and cautious in dealing with the US debt problem. Despite China's large holdings of U.S. debt, it would be unwise to act too pessimistic or too aggressive. Holding U.S. bonds is a financial investment, not a political tool, so market risks and international political factors need to be fully considered. At the same time, China should strengthen its economic restructuring and internal reform to improve its own strength and anti-risk ability to cope with changes and uncertainties in the international financial market.
Against the backdrop of the ever-evolving global economic landscape, China, as one of the largest developing countries in the world, must keep a cool and sober mind, flexibly respond to various changes, and make positive contributions to achieving sustained and stable economic growth and safeguarding national interests. Only by maintaining stability and resolving internal problems can China better cope with external challenges and strive to achieve its long-term development goals.