be frozen through U.S. sanctions (like those already used against Iran and North Korea). Of course, dumping U.S. Treasuries would impede China’s economic growth if dollar assets were sold and converted back into yuan (which would appreciate). But China could diversify its reserves by converting them into another liquid asset that is less vulnerable to U.S. primary or secondary sanctions, namely gold. Indeed, both China and Russia have been stockpiling gold reserves (overtly and covertly), which explains the 30% spike in gold prices since early 2019. In a sell-off scenario, the capital gains on gold would compensate for any loss incurred from dumping U.S. Treasuries, whose yields would spike as their market price and value fell. So far, China and Russia’s shift into gold has occurred slowly, leaving Treasury yields unaffected. But if this diversification strategy accelerates, as is likely, it could trigger a shock in the U.S. Treasuries market, possibly leading to a sharp economic slowdown in the U.S.
And security officials have expressed similar concerns about the U.S., where an even wider range of telecommunication infrastructure is potentially vulnerable. By next year, the U.S.-China conflict could have escalated from a cold war to a near-hot one. A Chinese regime and economy severely damaged by the COVID-19 crisis and facing restless masses will need an external scapegoat, and will likely set its sights on Taiwan, Hong Kong, Vietnam, and U.S. naval positions in the East and South China Seas... Confrontation could creep into escalating military accidents. DUMP TREASURIES? It could also pursue the financial “nuclear option” of dumping its holdings of U.S. Treasury securities if escalation does take place. Because U.S. assets comprise such a large share of China’s (and, to a lesser extent, Russia’s) foreign reserves, the Chinese are increasingly worried that such assets could
Climate change is not just a lumbering giant that will cause economic and financial havoc decades from now. It is a threat in the here and now, as demonstrated by the growing frequency and severity of extreme weather events.
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March 2020
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