Trump’s Asian Bankers Aren’t Happy
Donald Trump has made at least one thing great again: America’s debt load, one growing even faster than doubts about the world’s biggest economy.
That leaves the “Art of the Deal” president with some finessing to do with his bankers –- the biggest of which are in Asia. The U.S. built a huge and innovative economy, but China, Japan, Hong Kong, Taiwan, India and others hold the mortgage. Nine Asia-Pacific economies hold $3 trillion of IOUs that Trump’s erraticness imperils by the day.
Who in their right mind would increase exposure to the most chaotic White House markets have ever seen?
The answer is about to come into sharper view. Next week, the U.S. Treasury Department will sell $84 billion of notes and bonds in its first “quarterly refunding” of 2019. The level of demand will be an important omen for a Treasury looking at another $1 trillion year of borrowing to finance Trump’s $1.5 trillion tax cut. It borrowed an eye-popping $1.36 trillion in 2018. Deutsche Bank reckons it will hit up creditors for another $1.4 trillion this year.
Odds are, borrowing needs will continue to skyrocket. This broader trajectory makes a mockery of Republican Party orthodoxy that lower taxes pay for themselves. And it leaves China’s Xi Jinping, Japan’s Shinzo Abe and Trump’s other Asian bankers feeling buyer’s remorse.
Earlier this week, the Congressional Budget Office said Washington is apt to add another $12 trillion of public debt between 2020 and 2029. That’s on top of today’s roughly $22 trillion. Given talk of additional tax cuts, Asia is wise to worry about the value of dollar-denominated holdings.
Trump takes for granted that Xi, Abe and their Asian peers will dutifully, if not happily, hoard more Treasuries. But will they? Might all that red ink prompt Washington’s bankers to buy fewer Treasuries or, worse, call some loans?
Last March, Cui Tiankai, China’s ambassador to the U.S., hinted that Beijing might scale back on debt holdings amid concerns about losses. “We are looking at all options,” he said. A month later, Fan Gang, a top adviser to China’s central bank, said the time to diversify had come. “We are a low-income country, but we are a high-wealth country,” Fan said. “We should make better use of capital. Rather than investing in U.S. government debt, it’s better to invest in some real assets.”
The last time Beijing made such noises publicly about its $1.2 trillion of Treasuries was in 2009. Then-Premier Wen Jiabao implored the U.S. to protect its AAA status. “We have made a huge amount of loans to the United States,” Wen said. “Of course, we are concerned about the safety of our assets. To be honest, I am a little bit worried.” Washington, Wen stressed, must “honor its words, stay a credible nation and ensure the safety of Chinese assets.”
Yet that was back when Barack Obama was president. Obama hadn’t in the past run a series of casinos into bankruptcy, as Trump did. Nor had Obama ever broached the issue of defaulting on Treasuries. In May 2016, CNBC asked then-candidate Trump how he might respond if U.S. debt became untenable. He replied: “I would borrow knowing that if the economy crashed, you could make a deal.”
In December, The Daily Beast detailed a troubling exchange between Trump and his economic advisors. Concerns were raised that the $1.5 trillion tax cut might starve the Treasury, helping to create a balance of payment crisis. Trump shrugged and said: “Yeah, but I won’t be here” if that happens.
Hardly comforting words for Asians holding the deed to American excesses. Nor does it help that America’s standing in Transparency International’s annual corruption perceptions index nosedived six places since 2017 — to a 22nd ranking.
Yet the leverage here works both ways. In a less chaotic world, Beijing would be holding all the cards, demanding greater fiscal probity in Washington. Instead, China is embroiled in the globe’s biggest pyramid scheme.
If China and other Asian giants stopped supporting U.S. debt, the scheme would get shaky –- or come crashing down. Xi’s Communist Party is more trapped than it’s willing to admit. In that sense, Trump has a point in figuring Asia might continue adding to its U.S. debt holdings.
It’s hardly a given, though. Trump’s trade war has some elements of Xi’s government hankering for revenge. TheWhite House’s charges against China’s Huawei mark a sharp escalation in tensions. It’s hard to exaggerate the shock waves Beijing boycotting a U.S. debt auction or two would send through markets. And fragile markets at that.
Yet the fallout would cause trouble for Beijing. The resulting surge in U.S. yields would leave Xi’s team having to explain the disappearance of hundreds of billions of dollars of state wealth. Even Xi, China’s most powerful leader in generations, might see his legacy marred by such a humiliating loss.
Sharply higher yields would boomerang back on China’s economy, which just grew at the slowest pace since 1990. As borrowing costs skyrocket, U.S. consumers will buy fewer Chinese goods. The dollar’s drop, and the yuan’s resulting rally, would be an added headwind for Asia’s biggest economy.
Yet Xi can wield this trump card in negotiations on trade, Taiwan independence and any number of issues close to America’s heart. Even Japan, a close U.S. ally, has at time reminded Washington who holds the purse strings.
Take, for example, then-Prime Minister Ryutaro Hashimoto’s 1997 speech—in New York, of all places—when he dropped a bombshell on traders. “Several times in the past, we have been tempted to sell large lots of U.S. Treasuries.” Tense auto negotiations of the early 1990s, Hashimoto admitted, had some Tokyo lawmakers itching to use this nuclear option.
Now, China’s fingers are on the button as Xi and Trump brawl over trade. This illuminates what Dan Coats, national intelligence director, means when he calls America’s “unsustainable” debt a “dire threat to our economic and national security.”
How enthusiastically Asia participates in next week’s Treasury sales may gauge where Trump’s bankers stand. But it’s time Trump realized how desperately his profligacy needs Asia’s cash. And that taking the region for granted is a recipe for ruin.