Illustration: Tang Tengfei/GT

 

Behind the rapidly deteriorating China-US relations is US President Donald Trump's attempt to lure voters to his re-election campaign, promoting anti-China sentiment as his prospects become ever gloomier. 

China will not take on losses resulting from buying over-issued US Treasuries, which will undoubtedly damage the US dollar hegemony and even the US itself. That is another reason why the US is acting aggressively against China. 

The Trump administration has been striving to reboot the economy amid the uncontrolled domestic spread of COVID-19, halted businesses and skyrocketing unemployment. The US Federal Reserve not only lowered its benchmark interest rate to near zero, but also pledged unlimited quantitative easing (QE) in March. 

The Fed's balance sheet has grown drastically from about $4 trillion at the start of the year to about $7 trillion now, and may reach $8.5 trillion by the end of the year, nearly $5 trillion more than its level before the pandemic began.

Shifting the burden to other countries through unlimited QE - a move set to benefit only Americans - will work so long as the US dollar remains strong and interest rates and prices remain stable. The US could expand dollar issuance, massively increasing existing debt and raising new debt after maturity, rather than actually repaying its creditors. It would then not need to repay debt through products and services, but could draw endless new capital to boost its economy. 

But this sleight of hand from the Trump administration may not play out as intended. New US debt in the trillions has not received warm welcomes from central banks and financial institutions around the world. The risk of holding US Treasuries is rising given the US' surging financial deficit and its potential recession in the medium term, and even in the long term. And the demand for US Treasuries to hedge risks has been decreasing since the impact of the pandemic has been easing globally, with countries and regions striving to resume economic activities.

Central banks - including China's - are not eager to follow the US' aggressive monetary policy to stimulate the economy, which would lead to serious problems. China's central bank chose not to massively expand money issuance, a move which needs to be backed by more dollar assets. Instead, China has launched prudent and flexible monetary policy to facilitate the development of its huge domestic market and drive the growth of its economy.

The US has this time not been able to transfer its burden to others, and has instead seen its Treasuries dumped. Per data from the US Department of the Treasury, holdings of US Treasuries by international investors fell from $7.07 trillion in February to $6.86 trillion in May, meaning the US may have to take responsibility for its own massive debt.

With weak global demand for the greenback and the US' dim economic prospects due to its mishandling of the coronavirus, the value of the dollar has diminished. The dollar index has fallen sharply from a high of 103 points in March to below 94 points on Thursday - a two-year low that seems will continue its decline. Concerns over the dollar's structural depreciation are rising, threatening the dollar's global dominance.

In a misguided bid to enhance confidence in its currency, the US monetary authority has chosen to antagonize China and stir up tensions globally, rather than opting to resume its economy through coronavirus prevention measures and controlled money issuance. Behind that extreme choice may lie the aim of forcing China to buy more US debt, prompting international investors to purchase dollar assets amid intensifying global relations.

The US is expected to continue its current strategy of diverting its burdens. It is now crucial for China to boost domestic demand and improve its connections with global markets so as to achieve stable development and emerge unscathed from the US' all-out crackdown.

The authors are Liang Haiming and Feng Daxuan. Liang is chairman of the China Silk Road iValley Research Institute, and Feng is chief advisor of the China Silk Road iValley Research Institute. bizopinion@globaltimes.com.cn