STRATFOR: China’s Treasury Dumping Is The Equivalent Of A Nuclear Weapons Test

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In a latest comment, global intelligence firm STRATFOR wonders whether today’s surprising disclosure that China slashed its holdings of U.S. government debt in December might be a signal from Beijing that Washington should be careful not to get too tough with the emerging super power.

STRATFOR: However, China, previously the leading holder of U.S. debt, shaved its holdings of short-term securities (T-bills) by $34.2 billion for a 4.3 percent drop in total holdings, putting it behind Japan as the largest holder of U.S. debt for the first time since September 2009.

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China has for more than a year been the leading buyer of U.S. Treasury debt — especially short-term debt, helping to keep interest rates low in a key export market. However, the Chinese have also threatened to slow purchases or reduce holdings as a warning to the United States. Sino-American relations have been souring in recent months, with trade and economic tensions rising and the United States pushing for sanctions on Iran that could threaten China’s energy security. China was also displeased in December 2009 over the approach of a new U.S. arms deal with Taiwan, which has since been approved and sparked a controversy.

While China may reduce its holdings of U.S. debt in order to send a signal to Washington (though this is not necessarily the only reason it would do so), it has no intention of selling debt to the point that it wrecks the U.S. economic recovery, since doing so would destroy China’s own economic and socio-political stability.

Thus while it’s clearly not in China’s interest to exercise what we might call a ‘nuclear’ treasury-selling option, in our view even a short term jolt could be perceived as a deterrent to keep the U.S. in check.