15.05.201901:27 Forex Analysis & Reviews: The dollar faces a devaluation if China sells US government bonds

While the United States and China exchange blows in the form of an increase in import tariffs, market participants argue, what else can China respond?

It is possible that as a retaliatory measure, China could sell a US debt worth more than $1 trillion.

American politicians and economists have repeatedly expressed fears that China's large-scale investments in US state bonds provides Beijing with an economic weapon against Washington. These fears re-emerged into the light earlier this week.

In fact, by selling US Treasury securities, the Chinese will wreak havoc in their economy and play into the hands of the head of the White House, Donald Trump.

According to experts, such actions will lead to a decrease in the value of US government bonds and, accordingly, to an increase in their profitability, which is inversely related to the price.

At first glance it may seem that this goes against the priorities of D. Trump, who has repeatedly stated that he needs low interest rates. In addition, the yield on government bonds in general repeats the dynamics of Federal Reserve's discount rate.

However, the American leader's concern in interest rates is associated with the desire to stimulate economic growth in the country. Apparently, the owner of the Oval Office simply wants the Fed to reduce the cost of lending and allow banks to use the $1.4 trillion accumulated in reserves. It is assumed that large-scale sales by China of US government bonds will give just such an effect: interest rates on government bonds will rise, so the financial institutions will spend some of their reserves on the purchase of these securities. Thus, inactive cash will flow into the country's economy and stimulate its growth.

However, a side effect of the sale will be the devaluation of the US currency. China will receive dollars for its bonds, which it can exchange for other assets - the euro, pounds, yuan. Such a large-scale injection of USD into the market will certainly lead to a decrease in the greenback rate and an increase in the value of imports for the American consumer.

D. Trump has already made it clear that the United States should export more and import less. That is what he wants to achieve by increasing customs duties. Meanwhile, a weak dollar should encourage Americans to buy less foreign goods, while foreigners will be more willing to buy cheaper products from America.

At some point, the dollar may become so cheap that US imports from China will be equal in price to exports. The trade deficit will disappear, and D. Trump will calm down. Thus, if Beijing decides to get rid of a large number of US government bonds, the head of the White House will seriously advance in achieving his goals.