China is selling its giant hoard of U.S. government bonds, even before Trump arrives

Donald Trump isn’t even in office yet, but the prospect of his presidency is already reshaping the complex flows of international capital.

Take the U.S. dollar: It’s been rising fast since the businessman and reality-TV star stunned the world last month when he won in enough states to claim an Electoral College victory in the presidential election. The dollar has moved sharply higher and is now hovering at around a 14-year high.

Full disclosure: No one knows exactly why the markets do anything. But the consensus view is that the dollar’s rise is tied to the U.S. central bank, the Federal Reserve, raising interest rates faster than investors had expected, even just a few weeks ago. (At its meeting this week, the Fed lifted rates and indicated it would raise them at a slightly quicker pace than previously thought.)

The faster-paced Fed action is partly due to the expectation that Trump will use the government’s power to borrow and spend to somehow juice the economy, through big building projects, tax cuts, or some combination of the two. (If the federal government is trying to boost the economy, that gives the Fed — which has been the sole source of support in recent years due to the Republican-controlled Congress — the ability to take its foot off the gas a bit by lifting rates.)

The dollar’s rise has reverberations around the world, automatically causing other currencies to fall. The euro, for example, is close to parity, trading at around $1.04. (Time for a trip to Paris?)

And in the emerging markets, the rise of the dollar essentially translates to a sharp drop for local currencies — even in a tightly controlled financial system like China, where the government puts limits on how much the currency can rise or fall. The Chinese yuan has fallen 5 percent over the last year, and about 3.5 percent during the fourth quarter alone.

The decline in China’s currency, which has been fairly steady for a while now, means Trump is precisely wrong about what Communist Party policymakers are doing over there: China isn’t intentionally weakening its money to help its exporters.

True, that’s what China used to do during its years of hyper-growth. But the world’s second-largest economy is in a much different place now. Growth is slowing, debt is rising, and as a result, people are trying to get their money out of the People’s Republic, not in. (Generally, when money wants to flow out of a country, it weakens the currency; when it flows in, it strengthens it.)

China doesn’t want its currency to collapse. Which is precisely why it built up a safety fund — worth roughly $4 trillion just last year — in reserves that lets it manage the collapse.

So where do you put a trillion dollars for safekeeping? In U.S. government bonds, which is basically the safest form of investing that exists. But lately, China has been selling its reserves very quickly — a sign that it’s had to move more aggressively to keep its own currency from crumbling. In fact, new numbers from the U.S. Treasury department now show that China’s holdings have fallen so sharply in recent months that it is no longer officially the largest foreign lender to the U.S. Japan took the title in October, the most recent data available.

This is really pretty important. China has been one of the biggest lenders to the U.S. over the last 15 years. But if it is turning into a seller of government bonds—a war of words or worse between the two countries won’t do much to coax the Chinese back to us—that could make it even trickier for the U.S. to manage its $14.4 trillion in publicly traded debt.

And we will need a lot of people to loan to us.

U.S. debt levels will rise fast over the coming years if Trump’s policies blow up the U.S. deficit. If those policies resemble the ones pitched during the campaign, they would.