Trump’s Asian bankers hold Brazil-sized debt tranche

Finance officials in Beijing, Tokyo and elsewhere in Asia have a Brazil-sized headache as 2019 approaches. Their governments are by far the biggest holders of US government debt, the amount of which has swelled by nearly US$2 trillion under the presidency of Donald Trump.

That tidal wave of red ink is roughly equivalent to the size of Brazil’s annual gross domestic product. And that should worry Trump’s Asian bankers.

Pyramid schemes seldom turn out well for punters, particularly those late to the party. Yet President Xi Jinping’s government in Beijing and Shinzo Abe’s in Tokyo face a difficult decision: continue adding state money to the scheme, or cut their losses.

Losses are indeed likely on the $1.2 trillion and $1.03 trillion of US Treasury debt that China and Japan own, respectively.

That goes, too, for America’s other financiers around the region: Hong Kong ($192 billion), Taiwan ($164 billion), India ($144 billion), Singapore ($135 billion), South Korea ($110 billion) and Thailand ($66 billion).

America first, Asian bankers last

The odds are, Asia’s more than $3 trillion of exposure to Trump’s fiscal shenanigans won’t end well. The $1.5 trillion tax cut his Republican Party enacted in late 2017 assumes Asian officials would gorge on ever more Treasuries.

In some ways, it’s a logical bet. If Asia learned anything from the crises in 1997 and 2008 it’s the need for ample foreign-exchange reserves.

A desire to maintain trade competitiveness also gives governments incentives to support a strong dollar – pointing toward more US debt purchases.

Then again, the 6.6% surge in outstanding public debt in only 23 months of the Trump presidency hardly engenders trust. Trump’s binge-spending on the military, border security and any number of pet issues has more in common with pre-1997 Asian tigers than a G7 nation.

So does the flippancy with which he speaks of Washington’s $22 trillion burden.

Last week, The Daily Beast reported on a startling exchange between Trump and his advisors. As members of his inner circle raised concerns the US was setting itself up for a crisis, Trump shrugged and said: “Yeah, but I won’t be here” when it hits.

Such ambivalence should worry Asian governments holding the deed to US excesses. It’s also worth noting how Trump, on the campaign trail, even broached the issue of defaulting on debt.

Asked by CNBC in May 2016 how he’d rein in Washington’s runaway debt, Trump said: “I would borrow knowing that if the economy crashed, you could make a deal.”

This, from a man who, pre-presidency, made a living borrowing billions, declaring bankruptcy and then moving on. The risk for Asian central banks, of course, is that Trump views them in similar terms.

It suggests Trump will spend and rack up debt with abandon and then step away, leaving successors with the mess. And those successors include America’s creditors.

The risk boomerang

Risks cut both ways. As Trump intensifies his trade war, Xi could call his bluff using his vast dollar holdings as leverage.

In 2011, the government of predecessor Hu Jintao reportedly mulled doing just that. Back then, an editorial in the state-run People’s Daily argued that “now is the time for China to use its financial weapon to teach the US a lesson.”

In 2011, it was anger over Washington’s defense of Taiwan. Today it might be tariffs. Of course, any move by Beijing to dump dollars would boomerang back its way.

Along with massive paper losses, skyrocketing interest rates would slam US consumption and damage China’s all-important export engine.

But Xi’s government has every reason to worry about its exposure to Trump’s erraticism; after all, Beijing has worried about its Treasuries before.

In 2009, then-Premier Wen Jiabao implored Washington to protect Beijing’s money. “We have made a huge amount of loans to the United States,” Wen said. “Of course, we are concerned about the safety of our assets. To be honest, I am a little bit worried.”

Wen asked the US to “honor its words, stay a credible nation and ensure the safety of Chinese assets.” Granted, the risk of a US default is fanciful, no matter what Trump has said in the past.

But his White House needs Asia’s money, and Asia needs the US to be a responsible steward of trillions of dollars of its savings. Neither side of this symbiotic relationship should take the other for granted.

Least of all a White House assuming Asians will keep supporting its excesses.