News of these attacks and counterattacks in the capital market sent shivers down the spine of many as fears of a global trade war is one of the main factors driving capital to safer assets. Bonds have so far been one of those safe assets.
The escalating economic tensions between China and the US in recent months prompted China as the top foreign holder of the US Treasurys to sell off at a fast pace to maintain the monetary value of its currency and enter more currency into the market.
China, which is a major exporting country, holds the largest amount of foreign currency reserves in the world at $3 trillion. Since the early 1990s, China’s trade balance with the US has always been positive, and so a significant portion of these reserves are in US dollar. According to the US Treasury Department, as of the end of May 2018 the Chinese held bonds worth $1.188 trillion. `
With China’s gradual withdrawal from the US bond market, Russia Today reported last week that according to data released by the Treasury Department Japan surpassed China in June as the top holder of US Treasurys after raising its holdings to a nearly three-year high.
Holdings of U.S. bonds, bills and notes were increased by $21.9 billion to $1.12 trillion, the highest level in more than 2½ years. Meanwhile, China’s ownership rose for the first time in four months to $1.11 trillion, up by $2.3 billion.
Meanwhile, Russia, which has been actively liquidating US Treasury bills since 2018, continued cropping its stockpile in June by another $10.8 billion. Russia was once one of the top investors in US debt, and held $175 billion in 2010. In 2018, the Russian Central Bank reduced its US Treasury bond debt from $180 billion in 2011 to $14 billion.
Commenting on the reduction in Russia’s holdings of US Treasuries, the Central Bank of Russia said that the measure is aimed at diversifying the nation’s reserves.
“Making a decision on investment of funds, we assess all the risks, including financial, economic and geopolitical,” the head of the Central Bank of Russia, Elvira Nabiullina, stated in June.

In June 2019, Russia slashed investments in the US government debt to $10.848 billion, according to data released by the US Treasury Department. The reduction comes as Russia continues to dump US bonds for the fourth consecutive month.
Accordingly, in the short term, in June, Russia reduced its investment stake in US bonds from $6.774 billion to $5.552 billion.
Russia decreasing its share of US Treasury securities comes amid Moscow’s push to increase its gold reserves. Last month, the Central Bank of Russia reported that the country’s bullion holdings had totaled 2,208 tons, worth $100.3 billion, as of 1 July.
According to the US Treasury Department, Russia is not even among the top 30 holders of most US debt securities. Russia, which has tried to distance itself further from the dollar in its trade, is using the option to reduce the impact of US sanctions. Russia’s official statistics in August showed that the country’s gold reserves are close to 4 tons, up four times over the past decade, and their share of total foreign exchange reserves has increased by 5%.
Speaking to Sputnik, seasoned precious metals market analyst Dimitri Speck said Russia was playing it smart. “Russia is betting on the only valuable, liquid instrument which is not dependent on the debtor’s solvency. This is gold – the traditional store of value between states…[Russia], probably in part due to the threat of sanctions, is acting very rationally by cutting the share of dollars in its reserves and replacing them with gold.”
Experts believe China-US differences over trade and tariff issues will intensify due to China’s behavior in the bond market. China had earlier sold the bonds to protect the value of its national currency and seriously undermined the dollar’s monopoly.
Chirag Mirani, USB strategist believes that China’s continued bond sell-off could lead to developments in global markets and dramatically lower US Treasury bond yields.
Basically, the US-China economic dispute, by raising the likelihood of a combination of forex-trade war, has also led investors to secure reserves. American Bank Goldman Sachs has admits that the US sanctions and tariffs on economies such as Russia, China and Iran have lowered the dollar’s share in the world’s central bank reserves.
China is not alone in US Treasury bonds sell-off as other countries, including Turkey, Switzerland, India and Russia, are pursuing similar policies and have reduced the share of the US dollar in their portfolio.
China now holds 7% of the total $16.18 trillion US debt, the lowest level in 14 years. In 2011, China held 14% of US debt, but now it has turned into the largest importer of gold in the world in recent months after Russia.
Although China has shown a greater willingness to be patient with US restrictive policies, it has proven by selling off a large portion of bonds that it will use all its choices in this trade war. Most experts believe that if China sells a significant amount of these securities at once and within a short time, the US debt market and other markets will be disrupted.
Any disruption to the supply and demand of these securities could lower their prices and increase their interest rate, which act in reverse direction and as a result would raise the cost of borrowing for the US government. On the other hand, interest on these securities is based on interest rates in the United States, and interest rates range from mortgages to corporate loans, and raising them can lead to slowing US economic growth.
In addition, this move by China and Russia could undermine investor confidence in the US dollar as the world’s leading reserve currency.
At the same time, it should be borne in mind that China cannot auction off and drastically lower the price of these bonds, as lowering their prices will bring down the remaining price of the bonds. While China’s currency is not fully floating, Beijing uses its dollar bonds as a means to maintain the value of the yuan.
According to the Russian daily Vzglyad, chief analyst at the Center for Analytics and Financial Technologies Anton Bykov believes, “Structure of the world economy obviously is changing. This puts in before the leadership two important tasks: to predict who in the new model of world economy will be the leader – China or the US, and how to go through this transformational period with minimal losses,”
“The first group of countries, including Russia and Iran, chooses the leadership of China. They are actively moving away from the US dollar and increase in the structure of its gold reserves, the share of the yuan, gold and the Euro,” says Bykov.
“The second group, in particular Japan and the UK, chooses by far the US. These countries just continue to rely exclusively on monetary-economic factors and to maintain the existing structure of the gold reserves, which based on the U.S. dollar and expressed in this US treasuries. They make decisions based on simple financial reasons. The markets believe that the Federal reserve system in the light of deteriorating economic prospects for trade war with China will continue to lower the interest rate, and they are in a hurry to invest in treasuries at a higher rate”, – says the analyst.
According to the analyst, “the third group of undecided countries includes countries such as Germany, India, Poland and others. They are somewhere in between: like buying gold, but continue to buy US government debt.”
From a financial point of view, this move now may not look entirely correct and logical. However, it is worth remembering that Russia has begun to dump US paper in the spring of last year, which coincided with the first blow of the sanctions… It became clear that Washington can go on unprecedented measures against Russian Finance, primarily denominated in US dollars… Why lend to a country which at any moment can leave Russia without a reserve?”
China is also trying to defend itself against the US. However, unlike Russia, it cannot afford to ignore the share of US bonds because it will be difficult given the gigantic trade ties between the two countries and at the same time Beijing can use this issue in its negotiations with Washington. Yet, China has other financial problems which need money to be fixed.
Trump’s policies to clog the Chinese economy have now entrapped him. The escalation of trade war between China and the US last month reduced the yield of the US Treasury bonds to a two-year low.
“If they (the Chinese) decide they don’t want to hold them, there are other buyers,” said US Treasury Secretary Steven Mnuchin in reaction to China selling its stockpile of U.S. Treasurys adding, “And, obviously, that would be very costly for them to do. They’re looking at economics the way we’re looking at economics, so it is not something I’m losing any sleep about.”
Mounting of the tensions makes markets worried about the future of the world economy and Chairman and CEO of JPMorgan Chase, the largest of the big four American banks, Jamie Dimon says trade war could derail U.S. economic growth.
In a separate report, Morgan Stanley, another US bank, warned that the U.S. is now on “recession watch.” The US Central Bank has also warned that there is a 30% probability of a recession in the next 12 months.

US Economy on the Verge of Recession
US experts have warned against rise in the US debts saying the U.S. government’s public debt is now more than $22 trillion — the highest it has ever been since World War II- and it is heading towards recession, according to the Associated Press. In the short run, this reverse curve is a sign of economic cynicism. Reverse curves are in fact heralds of recession.
But Trump turns a deaf ear to these things. In reaction to these warnings, as usual he implicated the news media and the US Central Bank, and tweeted that the Central Bank governor has been more troublesome for the US economy than China.
Trump added in another tweet: “The fake news lameStream media is doing everything they can to crash the economy because they think that will be bad for me and my re-election,”
The president, meanwhile, dismissed concerns about slowing US economic growth and the possibility of recession.
However, the Swiss bank UBS said the world is just one step away from the great economic recession, and if tensions would not be averted in the coming weeks, one would expect huge changes in the projected growth rates for the global economy.
The UBS Bank said in its forecast of a 3.5% decline in world economic growth, debt levels in Europe have also raised to a record low, and although the US economy will probably not stagnate, the decline in many of its economic sectors is evident.
With respect to Europe and Japan, the UBS Bank also predicted that the central banks of these two economic giants would head toward negative interest rates and that China’s interest rate cuts would probably be high given the slowdown in economic growth.
According to a recent CNN report, Donald Trump’s advisers warned him additional tariffs on all Chinese-imported goods could “ruin Christmas”, as nearly 70 percent of the US economy is gained by consumer spending, and most chain stores owe their annual profits to sales on holiday occasions. Business owners had warned that imposing new tariffs could lead to shop closures, rising prices and layoffs before the holidays.
Despite all the warnings, the two sides seem to continue to insist on their past policies.
China and the United States have made it clear that postponing the next phase of trade tariffs does not indicate improved business relations. The US Secretary of Commerce said the purpose of postponing the next phase of trade tariffs against China is only to help American consumers. China, on the other hand, has accused Trump of violating a preliminary agreement between them saying China will retaliate if the 10% tariff is applied.
Trump, however, says he is not yet ready to sign a trade agreement with China. He linked trade talks to Hong Kong protests, saying that if Hong Kong protests lead to violence, it would be difficult to reach a trade agreement with China.
He emphasized: “I would like an end to the Hong Kong problem through a humanely solution. I think this is very good for reaching a trade agreement.”
While Trump seems to have delayed imposing new tariffs on Chinese goods on the pretext of Christmas, China has announced plans to increase tariffs on imports of some US goods worth $75 billion. The tariffs ranging between 5 and 10 percent will be effective as of September 1st and December 15th.
In response to China’s recent move, Trump is trying to retaliate for the recent US tariffs. In a Tweet, he promised to respond appropriately to China’s recent increase in tariffs on imported American products.
Although the White House has not responded to questions about the CNN report, they cannot undoubtedly ignore the high volume of criticism and concern expressed by economic experts and activists over the projected severe recession and the lack of robustness of its economic outlook.