On April 17, 2018, I wrote a post titled How We Know That China and Russia Do Not Want War.  In that post, I pointed out that China and Russia have economic interests that would be in contradiction to a conflict with the U.S. government.  Of course, it is obviously not in the interest of the politicians to get into a nuclear war too.

I stated that China was still the number one holder of U.S. government debt.  Then I stated the following:

“And while Russia’s holdings are small in comparison to China, even its holdings have stayed relatively stable.  Its holdings went up in early 2017 and then declined later in the year.  But year-over-year, its holdings are up slightly.  We’ll see in a couple of months if anything changed in March and April, but it is doubtful that it will be significant.

“If China and/ or Russia really wanted to make trouble for Washington DC, it would sell all of their Treasury holdings.  If Russia did it, it might not have that big of an impact.  But even the announcement of a sale of almost $100 billion of U.S. debt into the market would have its effects.  Interest rates would likely move up in response.”

Little did I know that just three months later and Russia would have sold off the vast majority of its holdings of U.S. Treasury bills.

The Treasury releases a report of major holders of Treasury securities each month.  In the latest report released on July 17, 2018, Russia was no longer listed.  It is now lumped in with “All Other”.

Meanwhile, China is still near $1.2 trillion in holdings with no signs of a decrease.  The only other country that is anywhere close is Japan.

As reported by RT News, the Russian central bank’s latest holdings totaled just $14.9 billion.

As I write this on the evening of July 23, 2018, long-term interest rates jumped higher earlier today with news of a possible change in course with Japan’s monetary policy.  Yet, this news of Russia from a week ago barely registered.  The news about Russia dumping its holdings was not widely reported, although there are some articles out there about it.  If this had happened in the pre-Internet era, we would be in the dark about it.

The selling off of almost $100 billion in U.S. Treasuries by Russia had virtually no impact.  The total holdings by foreign countries (meaning their central banks) actually went up in May 2018 (the latest figures) from the previous month.  So even though Russia dumped its holdings of U.S. government debt, other countries apparently picked up the slack, and some.

Say what you will about Putin, but he is smart.  He knows about the rhetoric coming out of the U.S. media and political figures that is into Russia bashing.  He understands the game that is being played, and he doesn’t want to take a chance of having more assets frozen or just getting outright stiffed on the U.S. Treasury holdings.

I’m sure Putin was in on this decision by the central bank.  I don’t think it was a move to poke at Washington DC.  It was a defensive move.

China is the elephant in the room when it comes to Treasury holdings.  The Chinese central bank really could move the market in a significant way.  The thing is, the Chinese officials are a bunch of mercantilists.  They think they have to hold U.S. Treasuries in order to hold down the value of their currency and subsidize their export industries.  The Chinese have continued to hold massive amounts of U.S. government debt, in spite of tariffs and tough talk by Trump.

Trump complains about the trade deficit, but he should be careful what he wishes for.  The Chinese could help the U.S. trade deficit by dumping a massive amount of U.S. debt.  Is that really what Trump (the low-interest rate guy) wants?

Unless things really get carried away with China, I don’t think the Chinese central bank is going to be doing a massive dump of U.S. Treasuries any time soon.  China and Russia are very different.  Putin may be a mercantilist to some extent (aren’t most politicians?), but he is more of a nationalist.  He isn’t foolish enough to attempt to subsidize exports by holding onto excessive U.S. government debt.

The Chinese “leaders” are foolish.  They are being pushed around by Trump.  Any new threat of tariffs, and the best the Chinese officials can do is to threaten a small amount of tariffs on U.S. goods in retaliation.  In other words, they will just shoot themselves in the collective feet.

The one major economic weapon that China has is its holdings of U.S. government debt.  They don’t even have to make threats with it. They can just send a signal over the next couple of months by selling off about $100 billion per month.

But again, they are mercantilists.  They are communists in name only, but they are still economically stupid.  They believe in a command economy, and I don’t expect any significant reductions in Treasury holdings by China in the near future.