The trade war won’t happen!

May 21, 2019 0 By Michel Santi


China is not a bellicose nation. For it, war is a matter of developing excessive trading relationships. Put another way, for China,the defence of its economic interests is an extension of war. As for its nuclear option in the context of this trade war with the USA, it would be to shed itself of its enormous assets in the form of American Treasury Bonds, in theory sparking a collapse of the dollar.

However, China only holds 1.13 trillion in US securities (according to official figures), which makes up just a fraction of the global sum of 22 trillion dollars of American debt. It is also perfectly aware that these T-Bonds are merely a substitute for cash…that it will have to invest one way or another when the – hypothetical – day comes it will have used up its reserves of American debt. It is therefore faced with a sizeable problem because such sums are impossible to invest using other currencies and in other places that offer the same degree of liquidity as the dollar and the American market respectively. In fact, for companies across the globe, and especially for China, only the dollar can securely handle raw materials, oil and the international debt market and without fear of excessive volatility.

Also, the world’s central banks – mainly those of fragile economies – hold mainly US Treasury Bonds that basically replace cash and that also have the advantage of paying interest. The Bank of China would therefore have claimants queuing up to acquire its US T-Bonds the day it decides to get rid of them, buyers that would find it a great privilege to be able to increase their own share of American debt. The US bond market effectively works as an ideal tool for central banks because it allows immediate liquidity in an environment where they would want to quickly sell off these assets in order to (for example) stabilise their currencies. America’s sovereign debt is therefore a genuine safe heaven for every one of the emerging or developing nations, as it is for China itself that, to protect its own vital interests, will absolutely have to find alternative investments which offer the same levels of stability, liquidity, profitability and flexibility.

In addition, the idea that China would liquidate its US Bonds (to be immediately absorbed by the emerging nations, but also by Japan and Europe) and still keep the revenue made from these sales in dollars would end up with the whole world’s banks holding Chinese deposits…to then reinvest them in the low-risk and profitable US private and public debt markets! Only a substantial devaluation of its currency (the Yuan) would allow the country to stymie, even neutralise, America’s customs barriers by increasing its exports to the US. Except that the collateral effect of such a manipulation of the Yuan would cause a chain reaction that would severely impact Chinese public debt and private debtors, along with a domino effect on the whole region.

All in all, the retaliatory measures at China’s disposal are more than limited in this confrontation with Trump’s administration who is aware that it needs US surpluses more than the US needs Chinese trade and finance. In its current situation defined by massive debts, capital controls and dependence on exportations to the United States, China has no chance of winning. These two countries’ trade war will therefore not happen, actually because for China it’s already lost.