BEIJING/SHANGHAI A feeling of deja vu is building in cross-Pacific diplomacy. China and the U.S. are sparring over trade, just as Japan and the U.S. did in the 1990s. Into the fray may step a man who only just retired: Wang Qishan. Until recently, Wang was China's anti-graft czar. He also played a central role in managing relations with Washington during the global financial crisis.
Back in 1997, when he was Japan's prime minister, Ryutaro Hashimoto admitted he had fought the temptation to sell the government's holdings of American bonds. The U.S. had been blaming Japan for a huge trade imbalance, leaving Hashimoto exasperated. Now U.S. President Donald Trump is pointing the finger at China, where President Xi Jinping must be battling the same urge.
After all, Xi presides over the world's biggest Treasury stockpile. Beijing may use its status as creditor to pressure the U.S. Wang seems to be a master at maximizing the political value of Treasurys.
Xi wants to forge "a new model of great power relations" with the U.S. and sees stable ties with Washington as the core of its foreign policy. But Trump has grown increasingly frustrated with China, arguing that it is not putting enough pressure on North Korea to halt its development of missiles and nuclear weapons.
On Jan. 23, Trump signed into law a steep tariff on imported solar panels -- a sector in which China is the No. 1 producer. If the U.S. further tightens the screws, the world's two largest economies could enter a trade war.
With ties at a critical juncture, there is speculation that Xi is looking to bring Wang back into the fold. There is a rumor he could be appointed vice president at the National People's Congress in March.
Wang served as vice premier in charge of finance under Xi's predecessor, Hu Jintao, and headed the Chinese delegation at the U.S.-China Strategic and Economic Dialogue. He is close to former U.S. Treasury Secretary Henry Paulson, who led the U.S. side at the dialogue until 2008. Their personal connection helped the two countries weather the fallout from the global financial crisis.
More recently, Wang was Xi's anti-corruption enforcer, serving as head of the Communist Party's Central Commission for Discipline Inspection. Wang, 69, retired from the Politburo Standing Committee last October due to an unofficial age limit, but many speculate that Xi will give him a key government post to help put U.S. relations on a firmer footing.
Even if Wang becomes vice president, it is unlikely to trigger an immediate change in China's Treasury policy.
When Bloomberg reported on Jan. 10 that senior Chinese government officials had recommended slowing or halting Treasury purchases, the State Administration of Foreign Exchange immediately denied it, saying the report "may be a citation from wrong sources or even false news." It added that "investing in U.S. Treasury bonds with foreign exchange reserves is a market behavior that is subject to professional management based on market situations and investment needs."
Market players tend to find the official line convincing. Zhao Yang, an economist at Nomura, said liquidity is key for managing foreign reserves, and there is no alternative to the dollar.
The chief of a Japanese bank's branch in Hong Kong, who spoke on condition of anonymity, suggested the Bloomberg report was useful for keeping the U.S. in check. It may have strengthened the notion in Washington that Beijing might actually unload the bonds if provoked.
"China is unlikely to sell U.S. bonds now, for it has no prospect of winning an all-out trade war with the United States," the branch chief said. "But the power balance between the two countries is rapidly changing. No one knows what will happen in five years' time."
Wang has used China's massive holdings of U.S. debt to apply pressure before.
Wang and Paulson faced off against each other at the opening of the bilateral dialogue in Beijing on Dec. 4, 2008. With the media present, the first few minutes are typically spent on cordial exchanges. But Wang did not hesitate to get down to business.
"We hope that the United States will take necessary measures to stabilize the economy and the financial market, as well as to ensure the safety of assets China holds in the U.S.," he said. By "assets," he clearly meant Treasury bonds.
That September -- the same month Lehman Brothers collapsed -- China had overtaken Japan for the first time as the top holder of American debt. Beijing continued to buy Treasurys despite growing concerns over the dollar.
In his memoir, Paulson wrote of "a bond of respect and trust between our officials that would prove very important as the financial crisis deepened in the year to come." When the U.S. needed to issue a huge volume of bonds to stabilize the financial market, it relied on China, owner of the world's largest foreign reserves.
Wang, though, had made it clear at the dialogue that China would make requests regarding U.S. policy. One such request came after a U.S. credit ratings agency downgraded Treasurys in August 2011.
The state-run Xinhua News Agency carried a commentary that "as the largest creditor, China has all rights to request that the U.S. guarantee the safety of dollar-denominated assets."
But after Xi rose to power in 2012, Wang was asked to spearhead the anti-corruption crusade, shifting his focus away from state finances and U.S. relations. China's foreign reserves subsequently dropped due to large market interventions to support the yuan, and in October 2016, the country ceded its status as the leading Treasury holder back to Japan.
The bonds became a less potent bargaining chip.
In 2017, the pendulum swung back. The yuan exchange rate stabilized, thanks to China's strict capital controls. The foreign reserves began to grow again, since they were not being used to sell the dollar and buy the yuan. In June, China became the largest holder of Treasurys again -- restoring the full political value of the bonds.
There is no telling how Wang might capitalize on that value if he indeed becomes vice president. But one thing is for sure: Treasurys will be a weapon in his arsenal, and investors should not presume China will not unload the bonds during Xi's reign, which will last at least until 2022.