A teller counts U.S. dollar bills at a bank in Qionghai, south China's Hainan Province.Photo:Xinhua
China reduced its holdings of US Treasury debt for the sixth straight month in January, which analysts said was mainly due to the US Federal Reserve's rate hikes and China's long-term security-driven diversification of its foreign exchange reserves.
The US Department of the Treasury released data on Wednesday (local time) showing that China's holdings of US Treasury debt dropped to $859.4 billion in January, declining for the sixth straight month and falling below $1 trillion, where it has been for every month since last April.
China's holding of US government debt is at its lowest since May 2010, when it held $843.7 billion.
However, China remains the second-largest non-US holder of US debt after Japan, which held $1.104 trillion as of the end of January.
Slashing investments in US Treasuries, which are an important component of China's $3 trillion-plus in foreign reserves, shows the flexibility of Chinese financial institutions' asset allocation and the diversification of investment portfolios, amid higher dollar interest rates and a volatile international environment, analysts noted.
"The value of US Treasuries started to fall when the US Federal Reserve started to hike interest rates in March 2022, while asset values in other developed economies such as the EU and Japan were relatively higher due to lower interest rates." Zhao Qingming, a Beijing-based veteran financial expert, told the Global Times on Thursday.
"As a method to optimize investment, it's natural for Chinese institutions to cut holdings of US government debt," Zhao said.
After seven aggressive interest rate hikes to tame inflation in 2022, the Fed raised the target for the federal funds rate by 0.25 percentage points in February. Generally, investors tend to sell off US Treasuries when interest rates increase, given their demand for higher bond returns.
China's holdings of US Treasuries fell below $1 trillion for the first time in 12 years last April.
The second-largest creditor's fire sale signals waning confidence, as the US faces economic woes such as its debt ceiling debacle and turmoil in its banking sector, Gao Lingyun, an expert at the Chinese Academy of Social Sciences in Beijing, told the Global Times on Thursday.
The US has only itself to blame, Gao said. "It's time for the Biden administration to stabilize the US economy and its financial policies to create more certainty for global investors," he told the Global Times on Thursday.
Foreign countries may now be less motivated to sell off US Treasuries, as the Fed is expected to slow down interest rate hikes in the coming months, Zhao forecast.
However, it could be a long-term trend for China to diversify its foreign exchange reserves faster into other currencies or assets, as the US' weaponization of the dollar poses greater risks for holders of US Treasuries, according to Chinese experts.
The US has used its financial services as a weapon against Russia amid the Russia-Ukraine conflict to a scale and depth unseen before. Taking it as a lesson, countries around the world have recognized the importance of diversifying their dollar-denominated assets.
For example, Iraq's central bank is reportedly planning to settle trade from China in yuan for the first time to improve its access to foreign currency, Reuters reported.
China has been promoting the use of the yuan in bilateral trade and investment over recent years. It has become the world's fifth-largest payment currency, third-largest currency in trade settlement and fifth-largest reserve currency, official data showed.
China's foreign exchange reserves stood at more than $3.13 trillion at the end of February, down $51.3 billion, or 1.61 percent, from the end of January, according to latest data released by the State Administration of Foreign Exchange.
I've delved into the intricacies of the article, and it's quite an interesting economic snapshot, isn't it? Now, let's break down the key concepts:
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China's US Treasury Holdings:
- China has reduced its holdings of US Treasury debt for six consecutive months.
- In January, China's holdings dropped to $859.4 billion, falling below $1 trillion for the first time since April of the previous year.
- Despite the decline, China remains the second-largest non-US holder of US debt after Japan.
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Reasons for Reduction:
- Analysts attribute the reduction to the US Federal Reserve's interest rate hikes and China's strategic diversification of foreign exchange reserves for long-term security.
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US Federal Reserve's Role:
- The value of US Treasuries started to fall with the US Federal Reserve's interest rate hikes beginning in March 2022.
- The Fed's seven aggressive interest rate hikes in 2022 aimed to control inflation, impacting the demand for US Treasuries.
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Chinese Financial Institutions' Strategy:
- Chinese financial institutions demonstrate flexibility in asset allocation and diversification of investment portfolios.
- The optimization of investments led to a natural reduction in holdings of US government debt.
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Global Economic Context:
- Higher dollar interest rates and a volatile international environment influence China's decision to adjust its investment portfolio.
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US Economic Challenges:
- China's reduction in US Treasuries is seen as a signal of waning confidence in the US economy.
- Issues such as the US debt ceiling and turmoil in the banking sector are mentioned as contributing factors.
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Long-Term Trends and Dollar Weaponization:
- Experts suggest that China may continue diversifying foreign exchange reserves into other currencies or assets due to the perceived risks associated with the US' weaponization of the dollar.
- The US has used its financial services as a weapon against Russia, prompting other countries to recognize the importance of diversifying dollar-denominated assets.
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Global Trends in Currency Usage:
- China's push for yuan in bilateral trade and investment is highlighted, with examples like Iraq planning to settle trade with China in yuan.
- China's yuan has become the world's fifth-largest payment currency, third-largest in trade settlement, and fifth-largest reserve currency.
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China's Foreign Exchange Reserves:
- China's foreign exchange reserves, standing at over $3.13 trillion in February, have seen a slight decrease from January.
In conclusion, the article emphasizes the intricate dance between global economic forces, highlighting the impact of central banks' policies, geopolitical tensions, and the evolving role of currencies in international trade. The expert opinions provided shed light on China's strategic moves and the perceived challenges faced by the US in stabilizing its economy.
