Blackrock: Reducing the Trade Deficit With China Will Lead to a Reduction in Its Demand for US Government Bonds
NEW YORK – February 26, 2019
BlackRock (an investment company with assets under management of $6.4 trillion) CEO Larry Fink spoke about the prospects for reducing the demand for US government bonds in the coming years.
In an interview with CNBC, BlackRock CEO Larry Fink noted that when concluding a trade agreement with the Trump administration and reducing the trade surplus with the US, China will continue to reduce ownership of US government bonds.
This trend partly began to manifest itself in the course of the trade war that began in 2018, when China reduced the volume of US government bonds from $1.184 trillion to $1.123 trillion. The resolution of the trade conflict, according to the BlackRock CEO, will only accelerate this process in the future.
Larry Fink also pointed to a further increase in the share of China's government bonds on the world market, which will also lead to a reduction in demand for US government debt. According to him, "in the long run, the US Treasury ... will be the loser."
Fink believes that in the long run, the US and China will somehow find a way to resolve the current trade conflict. This agreement will not be perfect, but it will be some kind of progress. Most likely, China will agree to increase imports of goods from the US. This will help to reduce the deficit in US foreign trade. But, China owns a large amount of US government bonds. They also accumulated it due to the trade surplus in trade with the US. Now, if China agrees to reduce the trade surplus with the US, there is a rather high probability that they will no longer need to own the same large amount of US government debt.
In the long term, this is a very disturbing situation. Who will be the new buyer of US government debt with this reduction in demand? Is it necessary to raise interest rates to compensate for the additional supply of government bonds at lower demand?
In addition, the global bond indices are beginning to increase the share of China's debt in its structure: Next year, one of the major indices is going to increase the share of China's bond by 6%. This will reduce the demand for US government bonds by about 2.6%.
In the light of such prospects, in the context of the demand for US government bonds, the US Treasury will be the loser.
Similar concerns were also expressed by Professor of Economics at Harvard University Martin Feldstein, who said that the demand for US government bonds from foreign countries is declining - and this is happening at a time when the US authorities are likely to be forced to increase the volume of debt issued - due to growing US federal budget deficits.
According to the BlackRock CEO, the most likely outcome of the scenario in which the question of who will buy US government debt will become more and more acute, there will be a noticeable increase in interest rates on US debt: An increase in payments will help increase the attractiveness of treasuries. But for the US, this means an even more significant increase in the cost of servicing debt obligations.
Similar assessments were made by experts from the Congressional Budget Office (CBO). The CBO predicts that over the next 30 years, the cost of servicing the US government debt will be equal in size to the total US government spending on social security programs.
The Peterson Institute for World Economy notes that with the current US government debt trajectory the US government will spend 6.3% of US GDP in 2048 on interest payments on government debt. This figure is more than double the annual cumulative expenditure of the US budget on research and development, infrastructure and education, which was observed in the US in 1968–2017.
If the US government in the future will face a noticeable reduction in demand for their obligations and interest rates on government bonds will rise to higher levels, these forward-looking estimates may be revised to even higher values.
This situation, in general, shows that, in an attempt to correct imbalances in foreign trade in the short term, the US risks aggravating its long-term debt problems.
If we proceed from the assessments of the American economists themselves and representatives of the financial establishment, the attempts of the Trump administration to renew the previous trade agreements do not only help to improve the long-term financial picture of the US, but worsen it even more, reducing the predictability of the economic course of the American authorities and the attractiveness of investment in the US Treasuries thereby increasing the risk premium. In this regard, the US is actually turning from the world's largest developed economy into a country of a developing debt crisis.