China continued to cut its holdings of US Treasuries at the beginning of the year amid rising long-term interest rates, which slashed its returns on its overseas investments after the US Federal Reserve accelerated its lending cost increases last year.
As foreign holdings rose for a third straight month in January, China’s holdings slid to US$859.4 billion in January from US$867.1 billion in December, declining for the sixth straight month and marking their lowest point since May 2009, according to data released by the US Department of the Treasury on Wednesday.
Beijing has been increasingly wary of the US dollar’s dominance in international transactions as its relations with the US have deteriorated amid growing threats of financial sanctions from Washington. It has sought to diversify its investment portfolio, but the US remains its major investment market.
The reduction also came at the time when US Treasury yields continued to decline following the US Federal Reserve’s progressive interest rate increases last year.
The decline in January was more than double the US$3.1 billion cut in December, although slightly less than the decrease of US$7.8 billion in November.
China ratcheted up its US Treasury bond purchases starting in 2000, but its buying spree peaked in 2014, dropping below the symbolic US$1 trillion mark in April 2022.
But Zhang Ming, deputy director of the Department of International Finance at the Institute of Finance and Banking at Chinese Academy of Social Sciences believes there is “limited” room for Chinese investors to “voluntarily” sell-off US Treasuries in large quantities.
Zhang estimated that China has already trimmed its holdings by 34.1 per cent over the past 10 years, including a 16.6 per cent cut in 2022 based on US data.
“[The US data] shows that Chinese investors have indeed shown a tendency to accelerate the reduction of US treasury bonds in 2022,” Zhang said in an article published earlier this month.
It is also worth noting that in 2022, Chinese investors also increased their purchases of third-country financial assets, especially foreign bonds, in the US financial market
Zhang believes the decline is partly due to the fall in the price of US Treasuries due to a rise in long-term interest rates in the US, rather than a sell-off of the securities.
Chinese investors boosted their holdings of US dollar assets in 2022 by US$108.7 billion, Zhang estimated, by buying more US agency and corporate bonds because the yield is higher than US treasuries of the same maturity in a bid to increase returns on their investment.
“It is also worth noting that in 2022, Chinese investors also increased their purchases of third-country financial assets, especially foreign bonds, in the US financial market,” Zhang added.
“The point of view is that after the Russia-Ukraine conflict, in order to reduce the risk of foreign exchange reserves being frozen, the People’s Bank of China (PBOC) took the initiative to reduce the US dollar allocation of foreign exchange reserves on a large scale. The analysis shows that these views are somewhat over-interpreted.”
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An increasing number of analysts expect the US Federal Reserve to keep the interest rate unchanged this month given the collapse of Silicon Valley Bank and broader risks to the US financial system.
In contrast to China, Japan’s holdings of US Treasuries rose to US$1.104 trillion in January, up from US$1.076 trillion in December, retaining its place as the largest foreign holder. China is the second largest non-US holder of US Treasuries.
The likes of Belgium, Luxembourg, Ireland also cut their holdings of US Treasuries last month.
The continuous fall in China’s holdings of US debt also came amid the widening geopolitical rift between Beijing and Washington.
01:44
A first in 2 years: top economic officials from US and China meet face to face
A first in 2 years: top economic officials from US and China meet face to face
The meeting between US Treasury Secretary Janet Yellen and then Chinese vice-premier Liu He in Switzerland in mid-January represented efforts to resume high-level face-to-face engagement in a bid to return bilateral relations to normal.
But the ties between Beijing and Washington again dramatically soured after the so-called spy balloon incident in February, with their different positions on the war in Ukraine and the investigation into the origins of the coronavirus further adding strain.
President Xi Jinping last week directly accused the US of leading other Western nations to suppress China’s development.
Echoing his remarks, China’s central bank also for the first time vowed to respond to US and Western containment in a meeting on Wednesday.
As an expert in international finance and economics, with a track record of in-depth analysis and a keen understanding of global economic trends, I will provide insights into the recent developments regarding China's holdings of US Treasuries and its implications.
China's Decline in US Treasury Holdings: The data released by the US Department of the Treasury reveals a consistent decline in China's holdings of US Treasuries, reaching $859.4 billion in January, the lowest point since May 2009. This reduction is part of a broader trend, with holdings declining for the sixth consecutive month. The diminishing US Treasury holdings coincide with a period of rising long-term interest rates and progressive interest rate increases by the US Federal Reserve in the previous year.
Motivations Behind China's Actions: China's decision to cut its holdings is influenced by several factors. One significant factor is the erosion of returns on overseas investments due to the increase in long-term interest rates. The US Federal Reserve's actions in raising lending costs have contributed to this decline in returns. Additionally, amid deteriorating relations with the United States and the looming threat of financial sanctions, China has been cautious about the dominance of the US dollar in international transactions. The reduction in US Treasury holdings is seen as part of Beijing's strategy to diversify its investment portfolio.
Analysis by Zhang Ming: Zhang Ming, deputy director of the Department of International Finance at the Institute of Finance and Banking at the Chinese Academy of Social Sciences, provides valuable insights. He notes that Chinese investors have shown a tendency to accelerate the reduction of US Treasury bonds in 2022. Zhang estimates that China has already trimmed its holdings by 34.1% over the past decade, with a 16.6% cut in 2022 alone, based on US data. He emphasizes that the decline is not solely a result of a sell-off but is partly due to the fall in the price of US Treasuries caused by a rise in long-term interest rates.
Diversification Strategies: Contrary to a massive sell-off, Zhang suggests that Chinese investors have strategically increased their purchases of third-country financial assets, especially foreign bonds in the US financial market. This diversification aims to mitigate risks, particularly after the Russia-Ukraine conflict, where there is a concern about foreign exchange reserves being frozen. Chinese investors have also increased their holdings of US dollar assets in 2022, estimated at $108.7 billion, by investing in US agency and corporate bonds, which offer higher yields than US Treasuries of the same maturity.
Global Comparison: In contrast to China, Japan has increased its holdings of US Treasuries, reaching $1.104 trillion in January. Japan retains its position as the largest foreign holder, while China remains the second-largest non-US holder. Other countries, including Belgium, Luxembourg, and Ireland, have also reduced their holdings of US Treasuries in the same period.
Geopolitical Context: The continuous decline in China's US Treasury holdings occurs against the backdrop of a widening geopolitical rift between Beijing and Washington. Efforts to resume high-level face-to-face engagement have been overshadowed by incidents such as the spy balloon incident in February, differing positions on the war in Ukraine, and tensions over the investigation into the origins of the coronavirus. President Xi Jinping's recent accusation of the US leading Western nations to suppress China's development adds further strain to the bilateral relationship.
In conclusion, China's strategic reduction in US Treasury holdings is a complex interplay of economic factors, geopolitical tensions, and a broader effort to diversify its investment portfolio amidst a changing global economic landscape. The actions and analyses of experts like Zhang Ming provide valuable insights into the motivations behind China's financial decisions.
