Daniel W. Drezner

Drezner gets results from the Defense Department!!

Hey, remember when I said that China’s debt holdings did not pose a serious threat to the United States?  And remember when I banged my head against the desk because Very Serious People continue to insist otherwise?  I bring this up because, according to Bloomberg’s Tony Capaccio and David Kruger, the Department of Defense has ...

Hey, remember when I said that China’s debt holdings did not pose a serious threat to the United States?  And remember when I banged my head against the desk because Very Serious People continue to insist otherwise? 

I bring this up because, according to Bloomberg’s Tony Capaccio and David Kruger, the Department of Defense has my back

China’s holdings of more than $1 trillion in U.S. debt and the prospect that it might “suddenly and significantly” withdraw funds don’t pose a national security threat, according to a first-ever Pentagon assessment.

“China has few attractive options for investing the bulk of its large foreign exchange holdings out of U.S. Treasury securities,” given their extent, according to the report dated July 20 and obtained by Bloomberg News

China is the second-largest holder of U.S. government debt after the Federal Reserve. Acting at the direction of Congress, the Defense Department studied the rationale behind the investments and whether “the aggressive option of a large sell- off” would give China leverage in a political or military crisis. China’s debt holdings have been cited as a sign of U.S. vulnerability by Republicans in this year’s election campaign….

“Attempting to use U.S. Treasury securities as a coercive tool would have limited effect and likely would do more harm to China than to the United States,” according to the report, which was sent to congressional committees by Defense Secretary Leon Panetta. “As the threat is not credible and the effect would be limited even if carried out, it does not offer China deterrence options” in a diplomatic, economic or military situation, the Pentagon found….

China decreased its Treasury holdings last year with little apparent impact in the market, Treasury data show. The world’s most populous country reduced its position in Treasuries in the first yearly decline since Bloomberg began tracking the data in 2001.

The holdings declined 0.7 percent, or by $8.2 billion, to $1.15 trillion last year. The decline was much steeper in the second half of the year when China’s stake plunged 12 percent, or by $163 billion, from an all-time high of $1.31 trillion in July 2011, the data show.

During that period, 10-year Treasuries rallied as the U.S. credit rating was reduced by Standard & Poor’s to AA+ from AAA and the European sovereign debt crisis worsened, pushing the yield to 1.88 percent from 2.80 percent.

Foreign investors held 50.3 percent of the $10.52 trillion in outstanding Treasuries as of June, government data show. That’s down from April 2008, when they reached 55.7 percent of the $4.64 trillion in U.S. marketable debt….

The Pentagon said in its report that the Fed also is “fully capable of purchasing U.S. Treasuries dumped” by China and “reducing the economic impact.”

A Chinese move to “suddenly and significantly” reduce its Treasury holdings “would fundamentally change the international finance and business community’s perception of China as a reliable and respected economic and financial partner,” the Pentagon said.

This report isn’t going to end the silly campaign rhetoric or the Niall Ferguson/Tom Friedman foreign policy community talking point, of course.  But I thought it was worth posting here so I can link back to it the next time I need to bang my head against a desk.   

If you’re an American and want o worry about China, don’t focus on the debt — focus on the apparent disappearance of China’s next leader

 Twitter: @dandrezner

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