Now that the nuclear option on dollar selling is over, I feel better

China has delivered a qualified vote of confidence in the dollar and US financial markets, ruling out the “nuclear option” of dumping its huge holdings of US government debt accumulated over the last decade.

But the State Administration of Foreign Exchange, which administers China’s $2450bn in reserves, the largest in the world, also called on Washington and other governments to pursue “responsible” economic policies.

From FT

This was never a creditable threat, but now you have to think through what would happen if they did go in this direction. The real threat is not going nuclear but a low dose of radiation through lower purchases over time. This is more likely and will also have a significant impact. Roll-over risk does not have to come in the form of selling but rather not buying when the Treasuries mature. Declines in the trade surplus force a slowdown in purchases. The question for the Chinese is whether on the margin the US is the best place to put new funds. The Chinese have been buyers of JGB's. China has a trade deficit with Japan and has close economic links with its neighbor.