According a Pentagon assessment,withdrawal of funds by China is never going to be a threat to the nation. China holds an amount worth over $1 trillion in US debt. A recent report by Bloomberg News says that China has no more than a few options when it comes to investing a major portion of their holdings in US Treasury securities.
China follows the Federal Reserve as holder of US government debt. The Department of Defense has been studying the logic behind the investments. They have been trying to know if a large sell-off is going to put China in an advantageous position in the military and political sector. The Republicans have been citing China’s debt holdings as something that points towards vulnerability in the United States.
At the Republican convention in Floridian August, Mitt Romney believes that the US should never be known for borrowing an amount as high as a trillion dollars from China. As of June 2012, China holds $1.164 trillion in US government securities.This is according to data released by the Treasury Department on 15thAugust 2012. China went on to increase its holdings in 2012. This happened when the US economy suffered a slowdown and the sovereign-debt crisis in Europe intensified.
China has been using their debt holdings to create pressure on the US regarding the pro-Taiwan policies. According to the August 2011 edition of the People’s Daily editorial, the time couldn’t be better for China to make the best use of its ‘financial weapon’ in teaching the US the right lesson. A Pentagon report suggests that China can go ahead with selling additional arms to Taiwan.
The report further suggests that an attempt to use the US Treasury securities in the form of a tool is going to have a limited effect only. In fact, it is China which is going to get harmed and not the United States. The Pentagon further found that the effect is going to be limited and China is not going to be offered with any better option in an economic, military and diplomatic environment.
Analyst David Ader from CRT Capital Group LLC in Stamford, Connecticut, who is also the head of US government bond strategy, has backed the conclusions drawn by Pentagon. Ader further adds that the Chinese being intelligent money managers know it very well that taking any such step is only going to bring negative results. This could lead to further worsening of the global trade, which is already facing the harmful effects of burgeoning debt. The inability of the non profit debt consolidation programs to make positive changes in the overall debt situation is also not bringing anything good to the table.
Fall in Chinese stakes
According to the Treasury data, the year 2011 saw China decreasing its Treasury holdings without too much of an impact on the market. This resulted in the reduction of the position of the world’s most populous country in Treasuries. There was a decline of 0.7 per cent ($8.2 billion) in the holdings. It stood at $1.15 trillion in the year 2011. The percentage of decline was sharp in the last six months of year 2011. This happened mainly because of a sharp decline of 12 percent in China’s total stakes.