China holds $1 trillion US Dollars – is this China’s real weapon for Big Trade War.
The Dollar is STRONG meaning imported goods and services for the US consumer are cheap and it keeps inflation down
The Risk: China floods market with $dollar FX and with $ Bonds (government debt)
E.g. Let’s say you hold $100 Dollars in FX – and are earning 3% = $3pa. If China floods the market with Dollars – it will weaken the dollar. Meaning goods imports into the US become more expensive. Food, raw materials = inflation.
To control inflation – the Fed would need to increase interest rates
If you hold $100 dollars in Gov. Bonds earning 3%pa = $3pa. If market is flooded with US Treasury Bonds – they become cheaper (supply and demand) - so your $100 bond is now only worth $50 but still paying fixed 3%pa - that a 6% yield – this would force US government to pay higher rates on money that it wants to borrow.
Dangerous game for China to play – as it would mean hurting themselves – by weakening the US position, it weakens their own position by making their own exports into the US even more expensive.
ADD TO THIS CHINA HAS TODAY THREATENED USA WITH RARE METALS RESTRICTIONS (USA tech industry need these to function). Markets have tumbled again this morning (29/05/19)