(Bloomberg View) — A lot of people I talk to are very worried about Chinese holdings of U.S. sovereign debt. The general idea is that if China decided to dump Treasuries, the U.S. economy would go into a tailspin. This is part of the overall narrative cited by Donald Trump and others that the U.S. is “losing” to China.
That was a plausible story. But now that China’s titanic economic boom is coming to an end, we’re finding that the story wasn’t right.
This became clear when China recently began dumping U.S. debt. In past years, China bought a lot of Treasuries in order to keep its currency cheap, so that it could sell lots of stuff at low prices to the U.S. (whether this was a wise economic strategy is a topic of vigorous debate). But as China’s economy has stalled, there has been pressure on its currency.
In August, China allowed its currency, the yuan, to depreciate to some degree. But since then it has been intervening in the foreign exchange markets to keep the yuan from weakening too fast.
If you want to support your currency, you buy it. And you buy it using foreign exchange reserves — in this case, China’s $1 trillion-plus stockpile of Treasuries, which it has been building up for years.
But China’s sales of U.S. debt haven’t sent the price of Treasuries plummeting (or thought of another way, it hasn’t caused interest rates to soar). Instead, as China has stepped out of the market, other investors have stepped in. It turns out that the demand for U.S. government bonds is much wider and deeper than many had expected.
So the doomsday scenario didn’t come to pass. Actually, this is the second time in recent years that something like this has happened. The first was when the Federal Reserve tapered off its quantitative easing program of bond-buying in 2014. The effect on Treasury rates was basically nothing.
Even if you believe that the rise in interest rates in mid-2013 was caused by investors predicting the QE taper, the change was only about 1 percent. It turned out that there were a lot of investors out there willing to step in when the Fed stepped out.
These two episodes should demonstrate that the people who now are buying an asset aren’t the only people willingto buy that asset at close to the recent price. And the number of investors in the world willing to purchase U.S. sovereign debt at about the current price appears to be enormous.
Why is that? The U.S. dollar is seen as a haven. When financial distress strikes the globe — as it does every few years — investors take shelter from the storm by buying Treasuries. This is why the U.S. is one of the few countries that saw its currency strengthen during the Great Recession. Even amid the dire turmoil of 2008 and 2009, the U.S. dollar was the least bad asset for huge numbers of investors around the world. This is why the dollar is known as the world’s reserve currency.
The importance of having the reserve currency is magnified when there is a glut of global savings. When there is a lot of cash without a lot of safe investment opportunities, people park their money in Treasuries.
So when you ask yourself, “Who will buy U.S. debt?”, the answer is: “Almost everyone.”
Of course, this might be a bad thing in the long run. When everyone wants your country’s assets as the ultimate safe place to stash money, it pushes up the value of your currency. That makes U.S. goods more expensive in foreign markets, which reduces U.S. exports and contributes to the country’s persistent trade deficit. That trade deficit has been very big for many years now, holding back growth and leaving future generations with a financial burden.
In other words, it’s good in the short term that neither China nor the Fed were essential to the U.S. Treasury market, but in the long term it is part of a structural problem afflicting the U.S. economy. We may live to regret being able to borrow as cheaply as we can.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.