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What is the potential impact on the U.S financial markets (the debt and the equity markets)...

What is the potential impact on the U.S financial markets (the debt and the equity markets) and the economy if China decides to liquidate a significant portion of its U.S Treasury bill reserves?

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Answer #1

If China Decides to liquidate US Treasury bill then the capital deficit will be created. The US funds its current account deficit through capital account surplus.
The liquidity will be pumped out of the economy creating shortage of liquidity leading to higher interest rates in the economy. The Value of dollar would be impacted as supply of dollar will increase. The debt market yields would increase and equity market will crash due to lack of loanable funds.

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