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China has sold a sizable portion of its Treasury stockpile back in 2015-2016, when domestic growth was slowing and raising concerns around the health of the global economy.

For those who don’t know or don’t recall, Speculators shorted the yuan in anticipation that China’s excessive debt levels would force the second largest economy into an abrupt slowdown. To stem the yuan’s weakness, China sold close to $500 billion of U.S. government paper. Yep, HALF A TRILLION.

What was the effect then?

This failed to dent US Treasury prices. In the summer of 2016, appetite for haven assets pushed the 10-year note yield to a record low of 1.32%.

And if they do it again on a much larger scale, this would be akin to cutting your nose to spite your face. Why? because their reserve funds are the single largest holder of US debt.

THen what? Selling Treasurys would weaken the U.S. dollar against the yuan, preventing Beijing policy makers from offsetting the impact of tariffs through a weaker Chinese currency.

China really has few choices for foreign-exchange reserves other than Treasurys, which carry much higher returns than ultralow or negative-yielding government bond markets in Europe and Japan.

We all need to remember that someone selling a US Treasury doesn’t mean that the bond must be repaid. The maturity schedule stays exactly the same; the initial impact upon the finances of the Federal Government is exactly zero. All that has happened is someone else holds the piece of paper from the Feds saying “I owe you.” So, in that initial iteration nothing has changed.

To the second iteration, either prices slump because of the oversupply - and China has taken a loss - or prices don’t. If they don’t then we’ve no problem; the market has absorbed the bonds. If prices do slump? Then sure, yields on Treasuries will rise. That’s obvious, for yields are the inverse of price. That means that as the US Treasury and Federal Reserve continue to finance the deficit, roll over maturing bonds, they’ll have to offer higher yields in order to find takers. This means that the financing costs of the national debt rise over time.

But by how much? No, I’m not going to provide an estimate but what’s the national debt at? The one that’s out there held by the general market is in the $16 trillion sort of range. China’s $1 trillion of that - 6% - changing hands isn’t likely to create any catastrophic move in either price or yields. So it’s all rather “Meh” as a threat anyway.

Further again, if we were to see large moves, what would happen then? The Federal Reserve’s balance sheet we now know is near infinitely expandable. Quantitative Easing showed that we could go print some trillions of new dollars and buy bonds with it. The Fed balance sheet extended out past $4 trillion as a result. Could we do that again to soak up $1.1 trillion in bonds being sold by China? Sure, we could. We would too.

Don’t forget the Fed is actually shrinking that balance sheet at present. Selling bonds, including Treasuries, back into the market, collecting the dollars and then cancelling them to reduce the money supply. They could and would stop doing that, obviously.

So, even if China did dump Treasuries, even if that small amount did create catastrophic price moves, we could and would still deal with it.

So it’s not exactly a credible threat nor something we need to worry about.

Finally, let’s ask ourselves, why does China US treasuries them in the first place? The usual argument being that China buys Treasuries in order to lower the value of the yuan. That makes Chinese exports to the US cheaper and thus keeps that trade surplus running. So if China sells the Treasuries and takes the money back home again what happens? The dollar weakens - or, the same thing, the yuan strengthens.

So, Trump’s tariffs mean that China wants the yuan to fall against the dollar. That’s how you deal with tariffs, go for a devaluation. In order to achieve this in your trade war, you’re going to dump Treasuries and thus raise the value of the yuan against the dollar?

Well, no, you’re not. For while it’s true that the rulers of China are at least nominally communist no one does think they’re stupid. China dumping US Treasuries would be entirely counterproductive from China’s point of view given where we are in this trade war thing. Thus, they’re not going to dump Treasuries as part of the trade war.

QED.