As the United States and Chinese economies decouple in the new Cold War, an important benchmark to watch is the selloff of China’s holdings of U.S. government debt. This raises a number of questions, ranging from how much of a selloff does China conduct to assessing the possible impact on the U.S. economy. After all, China is one of the major buyers of U.S. debt (though at a much slower rate), and the U.S. government has massive ongoing financing needs for its huge fiscal deficits and ballooning public sector debt. Considering that both the Democrats and Republicans lack any interest in fiscal prudence and that the coronavirus pandemic has added unexpected costs, the United States will remain dependent on access to investors, including those from overseas, over the long term. Although some of the new issuance in U.S. debt will be absorbed by the Federal Reserve, the impact of a major buyer walking away is likely to have consequences.
The hallmarks of U.S.-China Cold War-level competition are not difficult to discern: rising military tensions in key international hotspots, cyber-hacking of public and private sector operations, propaganda operations, and a decoupling from each other’s economy. The last is not easy, but is being pushed along, much of it from hawks within the Trump administration. To be fair, key Democratic leaders, including the party’s presidential candidate, former Vice President Joe Biden, are also sounding tough on China. For anyone looking, the Democratic Party left out the words “one China” from its Asia-Pacific policy for the first time in twenty years—a pointed jab at China and a positive signal to Taiwan. Whoever wins the presidential election in November, U.S. policy is likely to be defined by decoupling, and that includes financial linkages.
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