This is commentary by William Pesek, a longtime Asia opinion writer, based in Tokyo. He is a former columnist for Barron’s and Bloomberg and the author of Japanization: What the World Can Learn from Japan’s Lost Decades.
As President Joe Biden and congressional Republicans brawl over federal spending and government shutdowns, the audience that matters most isn’t U.S. voters—it’s Washington’s bankers 7,000 miles away.
The past 12 months were rough on Tokyo, Beijing, Taipei, and New Delhi, which, along with the other biggest Asian financiers, hold nearly $2.9 trillion of Treasury market securities. America’s Asian bankers confronted runaway inflation, Federal Reserve tightening, a Fitch Ratings downgrade, and Moody’s Investors Service threatening to yank away Washington’s final AAA rating.
Now, as 2024 opens, add sticker shock to the mix as the U.S. national debt tops $34 trillion. The U.S. may sell $2 trillion of securities in 2024, with the tacit expectation that Japan, China, and others will dutifully hoover them up.
There are signs that Asia might not go along the way Treasury Secretary Janet Yellen’s staff seems to believe. That could shoulder-check global debt markets in the year ahead.
Few market dynamics in Asia are more prone to conspiracy theories than the region’s vast holdings of Treasury debt. With tantalizing frequency, analysts and pundits buzz about how China might unleash financial Armageddon over Taiwan, U.S. tariffs, or just to keep Washington on edge. In decades past, Japan was the one that might pull the trigger over auto-industry disputes.
The Asian Treasury exodus was always something of a red herring. Dumping massive quantities of U.S. debt could devastate export-reliant economies. This “mutually assured destruction” dynamic meant Asia has been effectively trapped in U.S. debt.
Yet now Washington is giving Asia valid reasons to find a Plan B for trillions of dollars of state wealth.
Over the past two months, Chinese state media has run a series of articles and editorials asking why, oh why, Beijing continues to give the U.S. government the benefit of the doubt with $782 billion of Chinese savings.
In December, the Global Times warned that America’s surging national debt “may trigger another financial system crisis soon.” As such, “it is a precautionary and also prudent decision for China and other countries to trim their U.S. Treasury holdings, given the deteriorating fiscal crunch faced by the Biden administration.”
The newspaper also accused the U.S. of “reckless monetary tightening” and of the “weaponization” of the dollar. This latter reference is to Biden freezing a portion of Russia’s foreign exchange reserves in retaliation for its Ukraine invasion.
That was a week after respected economist Yu Yongding, a former top central bank advisor, argued that “China should accelerate the adjustment of its overseas asset and liability structure, improve returns on overseas net assets, and lower the share of foreign exchange reserves in its overseas assets.” The key, he argues, is reducing Beijing ownership of Treasuries by “stopping the purchase of new notes after existing holdings mature.”
China, of course, has been reducing its exposure to the U.S. dollar for over a decade now—slowly, methodically, and arguably for the right reasons. Beijing’s holdings peaked at just over $1.3 trillion in 2013. Since then, as Chinese leader Xi Jinping sought to increase the global use of the yuan in trade and finance, Beijing made a point of diversifying its reserves.
That leaves Japanese Prime Minister Fumio Kishida’s government as the “whale” among the Treasury Department’s overseas customers. Tokyo holds just over $1.1 trillion. Japan’s leaders have stayed close to Washington through administrations and haven’t shown any sign of changing tack.
Yet political chaos in Washington could prompt a reassessment of Japanese debt purchases, particularly if China begins writing titanically large “sell” orders. Even just word that Beijing is shunning U.S. debt auctions in the months ahead could force Tokyo into some unthinkable decisions.
Then there’s the problem of the first-seller’s advantage. Asian central banks could attempt to pre-empt their counterparts, roiling markets. Hints that Taiwan is dumping its $238 billion of Treasuries could unnerve trading pits everywhere. Ditto for India cutting losses on its $225 billion or similar moves by Hong Kong ($211 billion), Singapore ($196 billion), South Korea ($116 billion), and others.
The risk is a potential domino effect as one giant bond fund after another tries to front-run Washington’s biggest bankers. Interest payments on U.S. debt, now topping $730 billion, could spike.
This gets us back to Biden’s negotiations with Republicans led by House Speaker Mike Johnson. In November, Moody’s cut America’s credit outlook to “negative” from “stable” because of the same political polarization that drove Fitch to cut it to AA+ from AAA in August.
As Republicans loyal to former President Donald Trump, the likely GOP presidential nominee, and President Biden’s Democrats close ranks, Moody’s worries about the “risk that successive governments will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability.” Or even keep the government open, functioning, and paying its bills, including bonds.
Asia has every reason to worry a Trump 2.0 presidency might seek to use government debt as leverage in disputes. Meanwhile, Yellen must do some serious outreach to Asian leaders and currency reserve managers.
Time isn’t on Washington’s side as its Asian bankers mull whether to issue margin calls the global financial system can scarcely afford.
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