By Ye Xie, Bloomberg macro commentator
The Trump administration seems to be true to its word that it’s not done with China yet.
Over the past week, the White House has barred American investments in Chinese firms tied to the military and moved to draft regulations that could de-list Chinese companies from U.S. stock exchanges.
So far, these moves have had only limited ramifications for financial markets. Chinese ADRS performed roughly in line with U.S. stocks, and the yuan has traded near the strongest since 2018. While companies hit by the sanctions, such as China National Chemical, have seen their dollar bonds sold off, the nation’s broader investment-grade index held up well.
After all, the affected bonds were relatively small compared with the size of China’s dollar credit market. Including debt from their subsidiaries, about $54 billion of Chinese bonds could be affected by the sanction, or 6% of China’s total foreign-currency bonds outstanding, according to Goldman Sachs’s analyst Kenneth Ho. In addition, their maturity schedule is spread out over the next decade and beyond, which means there’s limited immediate refinancing risks.
For Beijing, the bigger concern is that the U.S. could cut off dollar funding to Chinese banks.
More than half of China’s $675 billion foreign-currency loans were denominated in dollars, and Chinese banks account for two-thirds of that dollar borrowing, according to a Goldman Sachs analysis of Bank for International Settlements’ data. Any restrictions on dollar funding could disproportionately affect Chinese banks, which in turn could hurt their ability to finance the offshore operations of Chinese enterprises.
As a net creditor to the world, China could sell off some of its foreign assets to manage the situation, if push comes to shove. Still, should Trump decide to press the “nuclear” button during his remaining time in office, it could be quite messy and mutually disruptive.