A number of recent articles suggest that Chinese officials may reduce their purchases of U.S. government bonds. It is very unlikely that China can do so in any meaningful way because doing so would almost certainly be costly for Beijing. And even if China took this step, it would have either no impact or a positive impact on the U.S. economy.

Suggestions by some Chinese officials that they may reduce their purchases of U.S. Treasury bonds show just how poorly the world understands the balance of payments. Here is what a recent Financial Times article had to say:

It was an unnerving piece of data for investors last week, buried halfway down an esoteric spreadsheet released by the US government that tracks how many Treasuries foreign investors buy and sell. China, the largest foreign creditor to the US government with total Treasury holdings in excess of $1.2tn, sold $20bn of securities with a maturity exceeding one year in March, according to US government data. The sales amounted to China's largest retreat from the market in more than two years.

The article then goes on to suggest that China's reduced holdings of U.S. Treasury bonds may reflect a strategic response to the escalating trade conflict between Beijing and Washington:

The data reignited fears that Beijing may weaponise its holdings as part of the trade war, wreaking havoc with the biggest bond market in the world, pushing interest rates higher and increasing the US government's cost of borrowing.

"If China starts dumping its Treasuries, it would cause huge financial instability," said Mark Sobel, a former Treasury department official who spent nearly four decades at the agency, adding that he considered this an unlikely scenario.

In January 2018, I explained on this blog why China cannot "weaponize" its holdings of U.S. government bonds. It is not because, as many observers seem to think, that selling off the bonds would cause havoc in the market and in doing so would undermine the value of China's own holdings. This is very unlikely. First of all, the Federal Reserve could easily act to overcome any temporary volatility. Second, as another article in the same issue of the Financial Times points out, rising uncertainty is causing investors to increase their purchases of U.S. government bonds:

US Treasury yields plunged to their lowest level since 2017 and shares fell more than 1 per cent on Thursday as the deepening trade dispute between the US and China raised concerns about global economic growth.

The rush to the relative safety of government debt pushed the yield on 10-year US Treasury bonds to roughly the same level as when the Federal Reserve began raising interest rates in 2015. Longer-term rates fell below shorter-term ones, a yield curve inversion that is seen by many traders as an indication of an impending economic downturn.