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Larry Fink about the long term risks from the trade talks
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Loading...The result of the war and the ongoing negotiations between the world's two largest economies threatens, said BlackRock Chief Executive Officer Larry Fink, which will have no immediate impact on markets and growth.
Long-term worries, according to the manager of the largest fund in the world, are linked to the US Treasury bonds.
"What worries me about the conversation between the U.S. and China — China has a $1.3 trillion pool of U.S. Treasurys, they've been accumulating U.S. Treasurys because of the trade deficit" Fink said.
"Now as China reduces its trade deficit with the U.S., the likelihood of them reducing their need for U.S. Treasurys is large," he added.
China is the largest buyer of US government debt. In January, media reported that officials in Beijing have recommended the Chinese government to cut or even stop buying US debt.
Market analysts describe this as a major threat to markets, as US bond financing needs have increased significantly in 2018, and this demand is expected to grow in the coming years.
In the last few months, China has continuously reduced US government securities, banknotes, and bonds. By December 2018, China holds US $ 1,123 trillion in US government debt, compared with $ 1,184 trillion in the same month of 2017, according to US Treasury Department.
The second largest buyer of debt in America is Japan, which also cuts its holdings: It is currently at $ 1,042 trillion in, compared to $ 1,061 trillion in the same period last year.
Still, the threat to US debt can be exaggerated, some analysts say. If China decides to sell a portion of the US bonds at a loss, this will likely lead to a weakening of the US dollar, which would result in greater competitiveness for US exporters. Also, many countries are likely to take advantage of and redeem the bonds, retaining the high interest rates they currently offer.
Still, demand for US government bonds will weaken, Fink warned.
"At the same time, the global bond indexes are now including more Chinese debt, and next year one of the big indexes is going to include up to 6 percent Chinese debt, which reduces U.S. demand by 2.6 percent of their debt," he said.
"So all of these things are playing out. We're going to see some winners, we're going to see some losers — but long term, the U.S. Treasury bid is a loser in this," he said, adding that an expanding U.S. economy could theoretically help offset those losses.
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