China sells off US debt while Japan and other countries increase holdings of Treasury securities.
In August, foreign holdings of U.S. Treasury securities rose for the third consecutive month to their highest level since December 2021, according to new data from the Treasury Department. But China captured the attention as it continued dumping U.S. assets by vast amounts.
Total holdings of U.S. debt increased nearly 3 percent year-over-year to $7.707 trillion. This was also up from July’s total of $7.655 trillion.
China reduced its holdings by more than $16 billion to $805.4 billion, down approximately 15 percent from the same time a year ago and the lowest since 2009. Chinese investors also offloaded about $5.1 billion in U.S. stocks in August, the highest on record.
Japan maintained its status as the world’s largest foreign holder of Treasurys, with investors in Tokyo raising their stakes by about $4 billion to $1.116 trillion.
‘The Long Goodbye’
A chorus of market observers contends that China sold its U.S. debt and equity holdings to support the Chinese yuan for intervention purposes. Beijing officials have reportedly pushed state-run banks to resuscitate the yuan. When this becomes the mandate, China sells dollar-denominated assets and uses the returns to purchase the yuan.
This year, the onshore and offshore yuan have weakened considerably against the greenback, hitting the lowest level since late 2007. In 2023, the yuan has been one of the worst-performing Asian currencies, tumbling around 6 percent.
Other economic experts argue that Beijing is attempting to rein in its finances during below-trend growth. As a result, officials might be using the government’s resources to prop up the world’s second-largest economy.
In the third quarter, China’s economy slowed to a 4.9 percent GDP growth rate, down from 6.3 percent in the second quarter. This was higher than the consensus estimates of 4.4 percent.
Diversification is another critical component of China’s war chest, with U.S. government debt representing about one-quarter of its total foreign exchange reserves, down from 59 percent nearly a decade ago. Beijing has been stockpiling a wide range of assets, from gold to crude oil to euros.
Nevertheless, some economists refer to China’s gradual dumping of U.S. assets as “the long goodbye.”
“After peaking above $1.3 trillion in late 2013, China’s holdings have since dropped by a combined $500 billion (or almost 40%) in the past 10 years to just a bit above $800 billion now,” wrote Douglas Porter, the chief economist at BM Capital Markets, in a note. “The reductions have clearly gathered steam in the past two years, likely aggravating the Treasury sell-off.”
Disinterest in US Debt
In recent weeks, Treasury auctions have seen diminishing investor demand, including for 3-, 10-, and 30-year bonds. The subdued interest has resulted from the federal government flooding capital markets with bonds and widespread concerns about Washington’s fiscal path that many, like Federal Reserve Chair Jerome Powell, contend is unsustainable.
The Treasury issued $1 trillion in bonds in the third quarter and is forecast to flood the market with another $850 billion. Meanwhile, the national debt has topped $33.55 trillion, and the federal deficit is close to $2 trillion.
That said, there was some good news in the bond market as the Oct. 18 $13 billion 20-year Treasury auction highlighted robust and better-than-expected demand. This offered a reprieve in the selloff of longer-term Treasury securities.
The benchmark 10-year yield crossed the crucial 5 percent mark on Oct. 19 for the first time since July 2007. It pared those gains and retreated below 5 percent again, but the yield has rallied by roughly 40 basis points so far this month.
Investors took their cues from Fed Chair Jerome Powell, telling the Economic Club of New York that monetary policy was not too restrictive.
“Does it feel like policy is too tight right now? I would have to say no,” Mr. Powell said.
While he signaled that the central bank might be done raising interest rates, Mr. Powell left the door open for additional tightening if growth and inflation fail to moderate.
“Still, the record suggests that a sustainable return to our 2 percent inflation goal is likely to require a period of below-trend growth and some further softening in labor market conditions,” he said.
The Fed has shown no indication that it will resurrect its immense bond-buying program.
The central bank is in the middle of reducing its balance sheet, which climbed to an all-time high of $8.9 trillion during the coronavirus pandemic. Officials are unclear when the Fed could return the balance sheet to pre-pandemic levels, but they have offloaded $1 trillion in the last year. As a result, some believe that it is unlikely the institution could start scooping up Treasury securities again.
What are the potential implications of China’s significant reduction in its holdings of U.S. Treasury securities?
Ith its holdings increasing by $12.8 billion to $1.339 trillion. Japan has held the top position since October 2018.
The increase in foreign holdings of U.S. Treasury securities is an important indicator of investor confidence in the stability and attractiveness of U.S. government debt. It suggests that despite ongoing economic uncertainties and geopolitical tensions, foreign investors still view U.S. Treasury securities as a safe and reliable investment.
However, the significant reduction in China’s holdings raises concerns about the implications for the U.S. economy and financial markets. China has been the largest foreign holder of U.S. Treasurys in the past, and its decision to dump U.S. assets by such large amounts indicates a lack of confidence in the U.S. economy and its fiscal health.
China’s actions align with its broader efforts to reduce its exposure to U.S. assets and diversify its foreign exchange reserves. The country has been actively promoting the use of its own currency, the yuan, in international transactions and has been investing in other currencies and assets, such as gold and commodities.
The decrease in China’s holdings of U.S. Treasurys could have several implications. First, it could put upward pressure on U.S. interest rates, as the reduced demand for U.S. government debt may require higher yields to attract other investors. This could increase borrowing costs for the U.S. government and result in higher mortgage rates for American consumers.
Second, it could impact the U.S. dollar’s strength, as China’s reduced demand for U.S. assets could weaken the currency’s value. A weaker dollar could have implications for international trade and could potentially impact the competitiveness of U.S. exports.
Finally, the decrease in China’s holdings highlights the ongoing economic and geopolitical tensions between the two countries. The U.S. and China have been engaged in a trade war for several years, with both countries imposing tariffs on each other’s goods. The reduction in China’s holdings of U.S. Treasurys could be seen as a further escalation of this conflict.
It will be important to monitor the trends in foreign holdings of U.S. Treasury securities in the coming months. If other countries follow China’s lead and reduce their exposure to U.S. assets, it could have significant implications for the U.S. economy and financial markets. It may also prompt the U.S. government to reassess its fiscal policies and the sustainability of its debt levels.
In conclusion, while foreign holdings of U.S. Treasury securities increased in August, China’s significant reduction in its holdings is cause for concern. The reduction reflects China’s efforts to diversify its foreign exchange reserves and reduce its exposure to U.S. assets. The implications of China’s actions on U.S. interest rates, the value of the dollar, and the ongoing tensions between the two countries warrant close attention. Monitoring foreign holdings of U
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