China’s promise to strike back after U.S. President Donald Trump increased tariffs on US$200 billion worth of Chinese goods on Friday has heightened uncertainty on how escalating trade tensions between the two countries will unravel and raised fears among investors and analysts of worst-case scenarios that will hurt global growth.
If China was unwilling to play ball on Trump’s terms, Beijing, analysts said, not only could retaliate by imposing countervailing tariffs of its own, but it also has a range of financial arsenal power at its disposal to punish the U.S.
For starters, China could fire back by dumping its vast holdings of U.S. government debt. Flooding the market with treasuries would push down US bond prices and cause the yields to spike. That would make it more costly for U.S. companies and consumers to borrow, in turn depressing America’s economic growth.
Cliff Tan, East Asian head of global markets research at MUFG Bank said it was unlikely that China would choose to scale back its holdings in U.S. treasuries sharply as that would hurt its own interests and fuel “extreme” market volatility.
“Dumping treasuries would be an ineffective weapon for China as that would send yields higher and hurt the positions of their own holdings in treasuries,” said Tan.
“If China got out of U.S. dollar assets completely, it would be very risky to them because of extreme market volatility.”
The trade war had seemed on the cusp of ending until Sunday when Trump threatened to raise existing tariffs in a tweet, sending Chinese stocks and its currency lower this week. The benchmark Shanghai Composite Index touched its lowest level in 10 weeks while the yuan is heading for its biggest weekly decline since mid-2018.
Minutes after the U.S. raised tariffs from 10 percent to 25 percent on Friday, the Ministry of Commerce reiterated its tough stance in the trade war, saying in a statement, “we’ll have no choice but to take the necessary countermeasures”.
Nonetheless, the statement said Beijing remained hopeful to resolve the problem “through cooperation and negotiations”. Vice-Premier Liu He has been in Washington since Thursday for two-day of trade talks. Talks will resume on Friday morning in Washington.
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China’s promise to strike back against U.S. tariffs has heightened uncertainty on how escalating trade tensions between the two countries will unravel https://t.co/08P0pSZuED
— POLITICO (@politico) May 10, 2019
To be clear:
We're borrowing billions from China to subsidize farmers who are losing billions in a trade war that that's bankrupting them because Donald Trump is an economic ignoramus who doesn't understand trade or markets and his sycophants won't tell him he's wrong. https://t.co/bwR9f8z1CT
— Rick Wilson (@TheRickWilson) May 10, 2019
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