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Bloomberg Journalist Tracey Alloway discusses a secret weapon that the US might deploy as the trade war with China intensifies. During their Imperial Dynasty, China enjoyed a lot of interest in bonds they issued to grow infrastructure, which they have never paid back. Many of these bonds were in default by 1938 and the People’s Republic of China has never recognised the debt. These bonds seem to have long been forgotten; however, there are a group of bond holders in the US who since 2001 have been pushing to receive payments. This group have been meeting with members of the Trump administration and it will be interesting to see what stance the President takes on this subject given his traditionally hard line against China on financial issues.
Why does it matter? Century-old Chinese bonds could become an unconventional weapon in the trade war, given the US is running out of things to tax. Adjusted for inflation, interest and other fees, they amount to around $1 trillion, perfectly covering Beijing’s holdings of US Treasury Bills. However, we doubt that China will ever recognize these bonds and triggering this old money will only result in more turbulence. Some have called this a ‘toddler’ move from Trump.
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