In its trade war with the US, China may not ultimately have the upper hand, but it is not without its own weapons of war.
The first is its currency. By keeping it artificially low, it can offset what would otherwise translate into price increases on its exports to the US. Keeping prices down may help China maintain its market share, but such a move comes at a cost.
The second weapon is its holdings of US Treasury bonds. The most recent data from the US Treasury show that with $1.17 trillion of US Treasury bonds China is the largest foreign holder.1 By selling its sizable holdings, China has the potential to generate upward pressure on US interest rates.
Perhaps not coincidentally, US Treasury yields have been trending higher this year while China has been gradually reducing its foreign exchange reserves.
Just this week, the White House announced that President Trump would meet with Chinese President Xi Jinping at the G20 meeting next month to ease the escalating trade tensions.
Given recent market turmoil, market participants will be keeping a close eye on how the trade talks unfold.
1As of July 2018, posted at treasury.gov on September 18, 2018.
Unless otherwise noted, data is sourced from Bloomberg.
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