FOR DECADES Americans have fretted that China might dump its vast holdings of Treasuries, undermining the dollar. Global investors therefore snapped to attention when Bloomberg, a news agency, reported on February 9th that China’s regulators have warned commercial banks against holding too many American government bonds. Some banks have been told to cut their exposure. In response to the news, the dollar fell against China’s yuan and Treasury prices wobbled.
Are fears of Sino-American financial warfare finally coming true? Thankfully not. In guiding its banks, China was not making a fresh geopolitical threat. At most, it was trying to limit the banks’ vulnerability to the many geopolitical threats that already exist. Dollar bonds have been a tempting asset for Chinese lenders, offering higher returns than similar securities at home. But any hit to the dollar could inflict heavy losses on overexposed lenders.
