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As the intensity of President Donald Trump’s trade war with China continues to ratchet up, analysts are beginning to fret about the possibility that China may exercise its version of a “nuclear option.” Chinese President Xi Jinping has not indicated any willingness to back down, and that may be because he knows he has numerous cards left to play. According to CNBC, China holds over $1.2 trillion worth of America’s mortgage-backed securities.
CNBC notes that loan servicer Ginnie Mae estimates that China’s MBS portfolio accounts for 15% of the outstanding mortgage balances in the U.S. The U.S. housing market would be utterly devastated if Xi decided to take the gloves off and flood the market with its MBS. It’s also worth mentioning that China holds a lot of US debt in treasury bonds. The combined weight of that economic power could devastate the American economy.
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Guy Cecala, executive chair of Inside Mortgage Finance, told CNBC, “If China wanted to hit us hard, they could unload Treasurys. Is that a threat? Sure, it is. They’re going to look at pushing levers and trying to put pressure. Targeting housing and mortgage rates is a powerful driver of something like that.”
Mortgage rates have been rising rapidly because of the recent Treasury bond sell-off, and $1.2 trillion worth of mortgage-backed securities flooding the market would be a devastating one-two punch for several reasons. First, it would almost immediately result in higher interest rates at a time when most Americans are already struggling with housing costs.
Second, China flooding the market with its MBSs could cause a chain reaction where other nations follow suit to avoid being stuck without a chair when the music stops. Canada and Japan also hold large mortgage-backed security portfolios. Under normal circumstances, it’s difficult to imagine either Japan or Canada taking such an extreme measure.
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Japan and Canada have been steadfast American allies on foreign and economic policy for decades, but Trump has targeted both nations with punishing tariffs. Even though the tariffs on Canada and Japan are not as extreme as the ones on China, it’s not hard to imagine either nation drifting further towards China’s orbit. In other words, the current circumstances are anything but normal.