We view this as largely a political ploy for re-election and a cynical one because it would destroy the financing of the U.S. “It’s such a crazy idea that anyone who has made it should really have their fitness for office reconsidered. debt, raising its holdings from $1.078 trillion to $1.268 trillion in the same period.Ĭliff Tan, the East Asian head of global markets research at Japan’s MUFG Bank, was blunt in his assessment of the tactic in an interview with South China Morning Post: Since March 2019, China’s holdings have decreased from $1.12 trillion to around $1.065 trillion. In March, China sold approximately $30 billion to shield the yuan’s value from the spike in the greenback’s appreciation. It might also be the catalyst for an aggressive de-dollarization push and allow China to diversify its $3 trillion in foreign exchange reserves, something that internal officials and regional allies have been pushing for several years. It might even choose to impose a new round of tariffs on U.S. China would be harmed in either event – America defaulting or Beijing cutting its holdings. The dollar could crater, bond prices would be pushed down, and an economic calamity would occur. In the immediate fallout, interest rates would skyrocket, making borrowing more expensive for the government, businesses, and consumers. government to cover its bills would be destroyed. By defaulting on even a portion of its liabilities, investors’ faith in the guaranteed nature of the U.S. The Treasury Department would be in a tough spot because it is issuing $2.999 trillion in debt to help cover the cost of its Coronavirus stimulus and relief spending. Let’s say Washington threw up its hands and informed President Xi Jinping that it would not repay 25% of the $1.1 trillion. if Uncle Sam defaulted on its obligations. But if you thought a spat over tariffs and import restrictions was horrendous for the Dow Jones Industrial Average, you can only imagine the turmoil that would unfold in China and the U.S. Global financial markets suffered severe cases of whiplash and migraines during the 18-month U.S.-China trade dispute. This four-decade-old policy would legally allow Trump to tear up its debts to America’s fair-weather friend. This would somewhat help mitigate risks should the president invoke the International Emergency Economic Powers Act (IEEPA). Local media are reporting that China may be considering its options, including cutting its holdings of Treasury securities by allowing them to expire and not be replaced by new ones. The consensus is that the Trump administration is unlikely to take this drastic action.

might choose to initiate “a synthetic default” that would target specific debtholders, which would involve President Trump demanding “that banks halt any payments of interest or principal to any account held by a Chinese government counterparty.”Īnalysts have already named this move the “nuclear option” since it would have long-lasting effects. and China, the White House is mulling a plan that would see the federal government canceling all or part of the $1.1 trillion debt owed to Beijing. While this would produce consequences, the other primary consideration would trigger massive ramifications for both countries.Īccording to various media reports in the U.S. He believes the public health crisis could have been stopped in China, and “it should have never happened.” The president and his administration are now reportedly examining ways to penalize China for its mishandling of the COVID-19 outbreak, which could include slapping new tariffs on the world’s second-largest economy. President Donald Trump recently told reporters that the United States has endured “the worst attack” the nation has ever witnessed, describing the pandemic as worse than Pearl Harbor and the September 11 terrorist attacks. You can potentially add a monumental debt default to the list of crazy things to transpire in 2020. But what if Washington were to take advantage of the Coronavirus pandemic and not pay its obligations to the Chinese government? As we have learned over the last couple of months, we are living in an environment where anything can happen.

Both nations each possess more than $1 trillion in American bonds, and if either Tokyo or Beijing were to unleash a fifth of its holdings onto global financial markets, it would be a day of reckoning. Over the last decade, China and Japan have routinely swapped the top spot as the largest foreign holder of Treasury debt. is deeply in debt, and it maintains a Rolodex of creditors at home and abroad – friends and foes alike.

If the u s defaults on its debt