For many years, people have argued that China can do whatever it wants because it owns so many treasury securities. If China gets mad at the U.S., they argue, China can sell all its treasuries. That would crash the bond market, cause U.S. interest rates to spike, and have extremely negative effects.
I’ve argued that is unlikely to happen, because it also would hurt China a lot. This article takes the same position, arguing it not only would hurt China in the short run but also would damage its ambition to be a major player in the global economy in the future.
The key problem is that these financial measures do as much damage to China as to the U.S., and several of them do tremendous damage to China’s neighbors and emerging-market countries that Beijing is courting in making the yuan an international currency.
The last time China depreciated its currency significantly, in August 2015, it set off a sequence of cascading declines in emerging markets and a rise in asset volatility. That was set off by a mere 2 percent yuan depreciation. Depreciation would have to be much greater to have an impact on trade. Enlarging the range of countries and asset markets that are affected by a bilateral trade dispute will earn China strong criticism from countries that might otherwise by partners.