China, which promised to punish the U.S. for allowing House Speaker Nancy Pelosi to visit Taiwan, made good on those promises Friday, imposing sanctions on the California congresswoman and canceling dialogue with the U.S. on climate change and military relations.
China has said it can annex Taiwan by force if it wants to and it opposes leaders of the self-ruling country engaging with foreign governments.
Economic forecaster Peter Schiff, a stock broker, gold investor and media personality, suggested there are other ways China could hurt the U.S.
“Just because #China didn’t shoot down @SpeakerPelosi’s plane doesn’t mean there won’t be consequences. The best way for China to hurt the U.S. is to sell Treasuries and buy #gold. Since this trade is also in China’s best interest, perhaps #Beijing will finally pull the trigger.” Schiff tweeted on Aug. 2.
China has been accumulating U.S. Treasury securities over the last few decades. In May 2022, its portfolio of U.S. government debt fell below $1 trillion for the first time since 2010 as part of a decline that began in early 2021, CNBC reported. China’s $980.8 billion debt in May was down nearly $100 billion or 9 percent compared to a year earlier. The decline has been attributed to China working to diversify its foreign debt portfolio.
Japan has replaced China as the No. 1 holder of U.S. debt with $1.2 trillion. The debt decline comes as the U.S. Federal Reserve has been raising rates to stop inflation from rising at its fastest rate in 40 years. When rates rise on bonds, prices drop — a capital loss for investors who sell bonds ahead of maturity.
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Many worry that China’s ownership of U.S. debt gives it economic leverage over the U.S., according to Washington, D.C.-based Center for Strategic and International Studies (CSIS), a nonprofit policy research organization.
“China’s stake in America’s debt has more of a binding than dividing effect on bilateral relations between the two countries,” CSIS wrote in an Aug. 26, 2020 update. “Even if China wished to ‘call in’ its loans, the use of credit as a coercive measure is complicated and often heavily constrained.”
As of July 24, 2022, China owns 3.2 percent of the total U.S. debt, down from about 3.68 percent in October 2021.
“A creditor can only dictate terms for the debtor country if that debtor has no other options,” CSIS reported. “In the case of the United States, American debt is a widely-held and extremely desirable asset in the global economy. Whatever debt China does sell is simply purchased by other countries.”
For example, in August 2015, China reduced its holdings of U.S. Treasuries by about $180 billion. “Despite the scale, this selloff did not significantly affect the U.S. economy, thereby limiting the impact that such an action may have on U.S. decision-making,” according to CSIS.
In a worst-case scenario such as the one Schiff suggests, where China called in all of its U.S. holdings, the U.S. dollar would depreciate, the yuan would appreciate, and Chinese goods would be more expensive.
Schiff is the co-founder and CEO of Euro Pacific Capital, a broker-dealer. He founded Schiff Gold, a precious metals dealer, in 2010.
Schiff has said in the past it would be impossible for the U.S. public debt to China to be repaid unless the U.S. dollar’s value is substantially diluted through inflation.
In an Aug. 2 podcast, Schiff talked about the threat of China damaging the U.S. economy and the urgency to buy gold before the Chinese get to it.
“We are beholden to the Chinese,” Schiff said in the podcast (36-minute timestamp. “Because all these years of artificially low interest rates and deficit spending, we’ve got this huge bubble economy, we now depend on China. China is our biggest banker and our biggest supplier. Our bubble economy cannot exist without the Chinese feeding it. You can’t have a service sector economy unless you can import real goods that are produced. The Chinese have taken our paper in exchange for their stock. But if they stop doing that, our whole house of cards economy comes collapsing down.”
U.S. households are on the hook for paying off the Chinese but they can’t, Schiff continued. “The US government can’t raise taxes on American families high enough to repay the Chinese so we’re going to default on the Chinese through inflation. Maybe the Chinese don’t want to wait around for that. Maybe they want to get out of Dodge before the shooting starts. Maybe they want to be one of the first countries to actually unload their U.S. treasuries then use the US dollars they get when they sell their treasuries to buy gold. Now if China is actually going to do this — and if they don’t do it now in retaliation for the Taiwan visit they are going to do it eventually — the one thing you want to make sure is that you front run China. You don’t want to dump your dollars to buy gold after China does it, you want to do it before China does it. So now is a great time, gold is still below $1800.”
Just because #China didn't shoot down @SpeakerPelosi's
— Peter Schiff (@PeterSchiff) August 2, 2022
plane doesn't mean there won't be consequences. The best way for China to hurt the U.S. is to sell Treasuries and buy #gold. Since this trade is also in China's best interest, perhaps #Beijing will finally pull the trigger.
House Speaker Nancy Pelosi meets Malaysia Parliament speaker Azhar Azizan Harun in Kuala Lumpur, Aug. 2, 2022. (Malaysia’s Department of Information via AP) / Images: China President Xi Jinping gives a speech in Hong Kong, July 1, 2022. (Selim Chtayti/Pool Photo via AP) / A currency exchange shop in Hong Kong, June 10, 2019. (AP Photo/Kin Cheung, File)