TLDR Up Front: “From trade war to currency war is a perilously simple step.” And the risk that China takes those steps increases as both sides run out of goods to levy a tariff on. This doesn’t mean that China will stop buying US Treasuries any time soon. The two countries are locked in a “fatal embrace” where the need of each other regarding debt exchange outweighs benefits of using it as a weapon of trad war. But China still has options – including reducing it’s foreign exchange student rate which could jeopardize the US university sector that currently depends on full-boat tuition paying students from Asia and the Middle East to make up for pricing out domestic degree seekers.
Full Context In the Back: With China stopping all US agricultural purchases the trade-war of competing tariffs has run it’s course. There’s little room left on either side to try new tactics in that realm. So there is now serious concern that the trade-war may expand to new fronts.
The big fear is the weaponization of the currency – either that they reduce their holdings of US Treasuries which is a complicated and potentially mutually harmful effort. The article describes it as the “fatal embrace” between China and the US.(1)
The fatal embrace is because the US needs China to keep buying US Treasuries to finance US debt and although their position has reduced from 14% to 7% of the entire portfolio. That sounds small until we remember that the “portfolio” here is just shy of $16T and even a 5% move means that $800B needs to be bought by someone else and the law of supply and demand indicates they probably won’t buy it as cheap as the Chinese.
Conversely though, China buys US Treasuries to keep it’s own savings rates and currency low, which in part fuels their expansion. So simply dumping all the Treasuries would be bad for them as well. Still – a currency war implies that both countries intentionally try to devalue their own currency, which means the purchasing power of a US dollar goes less far, debts are harder to repay and that has enormous consequences throughout a consumer-focused debt-laden economy.
However, what we see time and time again in conflict is that the “unthinkable” 20 years ago incrementally crawls towards us. Radical outlier thinkers on either side advocate for policies that sound crazy. Then those radical outliers gain prominence, influence if not prestige, and those ideas can begin to spread and gain adoption.
I’m watching the Great War series now on YouTube and one of it’s crushing reminders is how easy it is for the ‘unthinkable’ to become reality over a decade or more of no one paying serious attention.
My concern however is that there are other “fronts” that China may exert incremental pressure without incurring such a cost that could still have impact on the US. And the easiest lever to pull there is the inflow of foreign exchange students into US universities and graduate programs. I’m not sure what the published numbers are, but between China and Saudi Arabia I believe are a large percentage of foreign students attending universities paying full-ride tuition supporting those sky-high rates we keep talking about. And that isn’t a bad thing (I enjoy people coming here to learn!)
But as a tool of economic leverage universities are a fulcrum China can apply one-sided pressure too. They can absorb the disgruntlement of students not going abroad far more than US universities – already struggling to balance costs and revenue – can absorb the draw down of Chinese foreign students.
I’m not sure what would happen to the higher education landscape if the number of students from China dropped from it’s current rate today to a rate of 0 next year. There is precedence, MBS, the Crown-Prince of Saudi Arabia ordered all Saudi students to leave Canada over a perceived slight related to the Kasholggi case.
So with authoritarian regimes this kind of maneuver is possible, though China has a much larger base of students by sheer numbers so it may be more difficult. Plus China also benefits, in the long run – to the extent many of those students return bringing knowledge and skills.
So it’d still be damaging, but less of a fatal embrace and maybe more of a really angry tinder swipe.