China mulls easing US treasury purchases, move could hit Washington hard

China is America's biggest external creditor with $1.17 trn in Treasuries as of Jan, or 19% of all foreign holdings of US govt securities

China’s ambassador to the US wouldn’t rule out the possibility of the Asian nation scaling back purchases of Treasuries in response to tariffs imposed by President Donald Trump.

“We are looking at all options,” Ambassador Cui Tiankai told Bloomberg Television, when asked whether China would consider reduced purchases of US Treasuries. “That’s why we believe any unilateral and protectionist move would hurt everybody, including the United States itself. It would certainly hurt the daily life of American middle-class people, and the American companies, and the financial markets.”

China is America’s biggest foreign creditor. It held $1.17 trillion in Treasuries as of January, or about 19 percent of all foreign holdings of US government securities.

The US can ill-afford to see weaker demand for its debt from its major buyers. With budget deficits rising in coming years and tax cuts approved in December expected to hurt revenue, the Treasury has to sell more securities to pay the government’s expenses. The Federal Reserve is already scaling back purchases of Treasuries as it gradually reduces its $4.4 trillion balance sheet.

The prospect of swelling Treasury issuance helped drive benchmark 10-year yields to a four-year high of 2.95 percent in February. Next week alone, the U.S. is set to sell $30 billion of two-year notes, the most for that maturity since 2014. The surge in bill sales already taking place this year has fatigued investors and sent rates higher.

Trump on Thursday instructed his officials to impose tariffs on $50 billion in Chinese goods after the U.S. concluded China violates the intellectual property of American companies. The president also directed Treasury Secretary Steven Mnuchin to propose new investment restrictions on Chinese companies within 60 days to safeguard technologies the U.S. views as strategic.

China quickly hit back, unveiling tariffs of $3 billion on US imports.

Bloomberg News reported in January that Chinese officials reviewing the nation’s foreign-exchange holdings had recommended slowing or halting purchases of US Treasuries.

In the interview, Cui reiterated the Chinese position that the nation doesn’t want a trade war but is prepared to respond if the situation escalates.