Foto: Paul Kleiven / NTB scanpix
On September 3, the Global Times, the Communist Party tabloid, reported that Beijing was «likely» to sell some or all of its U.S. Treasury holdings.
More important, the paper suggested the United States might for the first time ever default on its debt obligations.
China is certainly trying to destabilize the United States, and it looks as if it’s about to declare total economic war on America.
Beijing has tipped its hand. The question for the Trump administration, therefore, is whether America should strike first.
Yes, it should, and Washington should hit Beijing as hard as it can. A vicious attack merits an overwhelming response.
«China,» the Global Times reported, «may gradually reduce its holdings of U.S. Treasury bonds to about $800 billion from the current level of more than $1 trillion, as the ballooning U.S. federal deficit increases default risks and the Trump administration continues its blistering attack on China, experts said.»
The Chinese paper then quoted Zhou Maohua of China’s Everbright Bank: «Not defaulting before does not mean it won’t default in the future, and risks are accumulating with the ballooning debts and the slumping economic outlook in the U.S.»
Yes, debts are «ballooning.» As a result, a two-year upward swing in the value of the dollar ended in March. Thank China for the reversal in the greenback’s fortunes. Large federal budget deficits resulting from coronavirus-relief measures and the expectation that the Federal Reserve will keep interest rates ultra-low have undermined the American currency.
Yes, Mr. Zhou, the American economy did «slump,» suffering a stunning 31.7% quarter-on-quarter GDP plunge in the second quarter of this year. Nonetheless, the U.S. is slumping no more.
On the contrary, America is now quickly recovering. The economy added 1.8 million jobs in July and 1.4 million jobs last month, and most indicators point to strong growth in the quarter ending the last day of this month. For instance, the latest Atlanta Fed estimate, dated September 3, forecasts 29.6% GDP growth for this period. President Trump’s Labor Day predictions of a «super V,» suggesting a rocket-like recovery, cannot be far off the mark.
In any event, China’s Communist Party publicly talking about an American default is grossly irresponsible. Its words are unwarranted, malicious-looking, and essentially a declaration of intent to destroy the American economy.
Washington should fight back.
For decades, American policymakers ignored criminal and other predatory Chinese trade practices in the hopes China would «enmesh» itself in the rules of the global economy. Unfortunately, those hopes have been dashed as Beijing has ramped up theft of American intellectual property and continued to violate trade and other obligations. No amount of persuading, cajoling or badgering has worked to convince China to accept agreements and norms.
In these circumstances, «decoupling» becomes attractive, as Trump discussed in his Labor Day press conference. «We lose billions of dollars and if we didn’t do business with them we wouldn’t lose billions of dollars,» the President said, undoubtedly making economists gnash their teeth.
Trump’s rationale for decoupling may not find support in classical economic theory — trade deficits do not necessarily translate into «losses» and are not considered inherently good or bad — but he is ultimately correct on the economic damage China has caused and what should be done.
Decoupling, in the first instance, means bringing manufacturing back to America, something that began in slow motion about a half decade ago as Xi Jinping, the Chinese ruler, started pushing foreign companies out, as companies decided to make goods close to customers, and as the difference in Chinese and American manufacturing costs narrowed.
Now, the pace of decoupling has picked up. President Trump’s tariffs, imposed under the authority of Section 301 of the Trade Act of 1974 as a remedy for the theft of intellectual property, have convinced many businesses that U.S.-China trade friction — and uncertainty — will only worsen over time.
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In addition, Beijing this year has doubled down on making itself an unreliable member of global supply chains. In March, for example, it threatened to throw the United States into a «mighty sea of coronavirus,» in other words, to cut off critical supplies such as pharmaceuticals and medical protective gear.
The threat, far from frightening Americans, galvanized President Trump into taking action, such as his August 6 executive order requiring the buying of «essential» drugs from U.S. businesses. Other countries, including Japan, are moving in the same direction, also trying to get their companies out of China.
Trump can hasten the departure of businesses from Chinese soil with tariffs and administrative measures, like enhanced customs inspections, designed to prevent China-made goods from coming into the U.S.
The loss of access to the U.S. market would shake China. Last year, China’s merchandise trade surplus against America amounted to 81.8% of its overall merchandise trade surplus, showing extreme dependence on the American market.
Trump, employing his powers under the International Emergency Economic Powers Act of 1977 and even the Trading with the Enemy Act of 1917, can also order American companies to end their technical cooperation agreements with Chinese entities, prohibit portfolio investments in Chinese markets, and end all sales of tech products.
China may not recover from such actions. Case in point: There is now talk that Huawei Technologies, which six months ago looked as if it would take over the world’s 5G networks, may soon have to stop shipping network equipment because it is having difficulty buying chips. Although it is now the world’s largest seller of smartphones, Huawei will have to end production. The Chinese company announced that production of its Kirin chipsets, for use in its mobile devices, will stop on the 15th of this month.
All this brings us back to the Global Times‘s threat to sell U.S. Treasuries. Chinese officials have been talking about dumping U.S. debt — the so-called «nuclear option» — since at least the middle of 2008.
Many Americans have been intimidated, saying Washington cannot oppose China because it owns Treasury debt. That is, however, a hollow threat even though China is the second-largest holder of those obligations, carrying $1.074 trillion of them, according to Treasury Department figures.
Chinese officials have not carried through for several reasons. For instance, if they sell Treasuries, they get back dollars because 100 percent of America’s obligations are denominated in its own currency. If Chinese officials mean to hurt America, they have to convert the proceeds of the sales into other currencies. That conversion will drive the values of those other currencies through the ceiling, and the central banks in those countries will have to rebalance values. In other words, they will have to reduce the values of their currencies by buying… dollars.
The net result of China carrying through on its threat is to leave U.S. Treasury obligations in the hands of countries far more friendly to the United States. Yes, the Chinese can cause turmoil in global markets for a few weeks, but the end result of their effort will be a United States that no longer feels beholden to Chinese communists.
Moreover, any move to suddenly attack the dollar by selling Treasuries will tend to make the renminbi extraordinarily expensive, thereby killing off the Chinese export sector, still a mainstay of the Chinese economy.
China has already unloaded about a trillion dollars of Treasury obligations since the middle of 2014 to support the value of its own currency, and there has been no effect on either the global markets or America’s ability to borrow.
The tenure of China’s Communist Party depends on its continual delivery of prosperity to the Chinese people, so that organization exists only with the permission of the United States. After the hostility evident in the Global Times threat of last week, it is time to withdraw that permission by cutting off trade, investment and technical cooperation.
So, China wants to sell American debt? Be my guest.
Gordon G. Chang is the author of The Coming Collapse of China, a Gatestone Institute Distinguished Senior Fellow, and member of its Advisory Board.