A quick look at Dalio’s warning of US T-Bond weaponization by China

2 min read

World’s largest hedge fund manager, Ray Dalio of Bridgewater, said “he wouldn’t rule out China using its Treasury holdings to gain an upper hand against the U.S, in the trade war — a view that contrasts with many other observers …” reported by CNBC on Aug 16.

In the wake of China’s USD1.11 trillion of US debt in June (second to Japan), he elucidated his view as follows:

“We have a debtor-creditor relationship, not just a trade relationship. And (that) can be a dangerous thing …”

“What we worry about … is that in this new world of adversely affecting each other economically and hurting each other’s business, each tries to think: ‘Now, how can I do the other the maximum harm?’ And the Chinese are clever at doing that …”

Briefly speaking, among the various reasons why Beijing maintains a huge holding of the US Treasuries, there is an operational need. With the continuous net inflows of non-cash US dollar funds, China must deposit them somewhere. You cannot put too much into private commercial banks because they all bear credit risk, that is, a bank may suddenly become bankrupt (e.g. the subprime crisis 2007-10), not to mention the system risk and market risk, etc.

The safest haven, therefore, is the US Government, in the form of holding its Treasuries, assuming all of them will be repaid in full on time.

So, the saying that Beijing may weaponize its Tsy holding by selling them in bulk so as to push the Tsy price down, thus the yield (the interest rate) sharply up, carries at least two implications.

First, Beijing aims at hurting the US economy for a sensible or strategic reason.

Second, China has the capability of converting gigantic quantity of US dollars into other currencies with well-grounded confidence that the inland exchange from Renminbi into USD by (foreign) investors, traders and other commercial entities can be well under control.

In short to medium term, say, 2-10 years, it is unthinkable. In longer term, such as 15-30 years, however, Beijing may be able to work out such a scenario.

The opinions expressed are those of the author, and not necessarily those of China Daily Mail.

Tony Simon

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