J. Safra Sarasin: China Not Expected Dump US Treasuries
Although trade tensions are rapidly escalating, China is not expected to weaponize its US Treasury holding, according to J. Safra Sarasin which believes serious dumping could lead to self-inflicted damage.
There are increasing questions about whether or not China will dump US Treasuries in response to an intensified tariff war – a move that could trigger a surge in yields and significantly drive up US borrowing costs. According to a report by J. Safra Sarasin, China is unlikely to «weaponize its treasury holding».
«With its large current account surplus, China continues to accumulate US dollar financial assets. While it looks like it has stopped accumulating more US treasuries, its state banks have continued to build up other US dollar papers with net foreign asset now at $1.3 trillion,» said Mali Chivakul, J. Safra Sarasin’s emerging markets economist and author of the report.
«China would incur a big loss if it dumps its treasury holding to the market, hurting not only itself, but also other countries (Japan’s treasury holding is larger than China’s) around the world.»
Trade Decoupling
Nonetheless, Chivakul believes that the recent trade war escalation suggests that «full trade decoupling is increasingly likely».
«Even if we may see a de-escalation later, a decoupling could still be the result,» he said.
For the US, the bank expects another supply shock in the next two to three months similar to the one experienced during the Covid pandemic. Despite stockpiling and front-running of imports, some sectors that are more heavily reliant on Chinese inputs, such as communication and IT, will be affected the most.
Impact on China
And on China, producers are forecasted to take a big hit in the near term equivalent to an estimated $440 billion, or 3 percent of GDP, while seeking other markets to replace US demand.
The bank believes that the Chinese government will accelerate its stimulus plan and the People’s Bank of China's recent weakening of its currency fixing by 0.4 percent since April 2, suggests that it will gradually take small steps to lower the Chinese yuan to help cushion the tariff impact, though not to the extent of accelerating capital outflows nor affecting relations with other emerging market economies.
«Over the next 2-3 years, we expect global manufacturers, Chinese included, to continue its China+1 strategy as US tariffs have become prohibitive for goods shipped out of China,» Chivakul added.
