On China Holdings

The pre-packaged meme on the Trump trade policies with China is now on the shelf from several sources. it goes like this: "China could sell a chunk of its large holdings causing yields to rise, the ccy to fall, and all sorts of trouble."

The story sounds right but loses some hype when looked at correctly. One must think about why and how China comes to want/need to purchase such large quantities of US obligations in the first place. The Administration actions would act to reduce the source demand. China could sell off chunks but the question then becomes "to who?" LSAP provided a well structured environment to adjust holdings.

There is no doubt that the threat overhang of a $T in government holdings can have on the issuing country is significant. The idea that China weaponizes those holdings is a totally different animal. Remember, the Chinese were massive owners of defunct notes from the permanently insolvent Fannie/Freddie and made out just fine by hanging on.

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