Market Overview

A new swing in US-China relations over accusations from the US authorities concerning the covering up of important information on the origin or spread of the COVID-19 infection by China could potentially become a determining factor for markets. The White House, according to the media, is considering writing off part of the $1.1 trillion US debt owned by China.

Washington sees the damage from the coronavirus pandemic that is to be compensated by China to be at as much as $160 billion. It seems that the US authorities have an enticement to turn this amount in its own favour. In other words, to write this debt off.

However, this could have disastrous consequences as this unprecedented move could potentially alienate other governments to invest in US Treasuries. This move from the US - if it is really going to happen - means a partial default on the US sovereign debt, an unimaginable event that never occurred. Trust in US assets as safe haven investments could be dramatically undermined for years or even decades. The precedent of the default for whatever reason could be a univocal sign of a US debt paradigm crash for investors throughout the world.

The debate of the China punishment involving the possible debt write off came just in time as the US is set to attract as much as three trillion USD by issuing new Treasuries needed to mitigate the coronavirus economic impact. This amount, which may hardly be allocated to the White House, may continue to move in the direction of Chinese debt holdings. Moreover, the price of existing debt may likely rise. This scenario may affect business debt too and could lead to a long lasting debt crisis in the US itself. So, "saving" on the Chinese debt could potentially turn out for massive losses of the liquidity needed for the US.

China by itself could limit its holdings of the US debt considering such possibility. The sell-off of the US Treasuries by China could be an extreme solution and would lead to severe drop in prices and the reshaping of the world's financial order. The US Dollar may suffer too, and this could harm the Chinese trade balance as well as trade relations of the US with other countries.

Considering all this, it is highly unlikely that the White House will take serious actions in writing off Chinese US debt holdings. However, if Beijing simply ceases to buy new US debt, it may lead to a serious mistrust from other investors and eventually - to the negative effect on US Treasuries and the Dollar exchange rate.

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