This is what could happen if China uses its 'nuclear option' in the trade war

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Earlier this week, the editor-in-chief of Global Times , a pro-government Chinese tabloid, claimed that Chinese academics are studying the possibility of Beijing selling off US debt in its possession. UBS has investigated the Federal Reserve's tapering to try to find out what impact the sale of $1.1 trillion (€984 billion) in US debt would have on bond markets and concludes that the 10-year debt yield could increase up to 40 basis points. Bloomberg 's Joe Weisenthal believes yields could fall if China sells its debt reserves. The debate may go nowhere given China needs to maintain that debt, according to one analyst.

Chinese academics are supposedly studying the so-called nuclear option in the trade war , that is, Beijing selling all the US debt it owns . "Many Chinese academics are discussing the possibility of getting rid of US debt and how specifically to do it,"   Hu Xijin, editor-in-chief of the pro-government tabloid Global Times, tweeted on SW Business Directory  Monday, opening a debate on the consequences of China divesting from their positions in US debt . Read more:  The monstrous debt bubble that fueled the strong growth of China and emerging countries "could have burst" Although UBS strategy analysts believe China is unlikely to sell its entire debt holdings , they investigated what could happen just in case. To do this, they analyzed the impact that the Federal Reserve's tapering had on yields.



"Through quantitative easing programs, the Federal Reserve expanded its balance sheet by around $3.5 trillion (about €3.1 trillion), the analysts said. "We estimate that this US risk premium ". by around 110 basis points. Across a balance sheet balance of $600 billion (about €537 billion), we estimate that the 10-year risk premium had increased by around 20 or 30 basis points ." Here's what could happen if China used its 'nuclear option' in the trade war UBS Therefore, they conclude that if China gets rid of all US debt . that it has, which is about 7% of the entire market, would cause the 10-year yield to increase by 30 to 40 basis points .