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China has been quietly trimming its U.S. bond holdings to the lowest level since 2010 and may continue to do so in the near future, according to Globaltimes. That’s a significant shift from the previous years when China was buying U.S. Treasuries, which could spell trouble for the U.S. debt markets for several reasons. First, China and Japan have been among the top holders of U.S. debt, and selling that debt could put upward pressure on U.S. long-term interest rates. Second, these sales come at a time the Federal Reserve is reversing its Quantitative Easing (Q.E.), selling U.S. Treasuries, too, which has already been pushing long-term interest rates higher.
Why is China selling U.S. Treasuries? To cut down losses as Treasury bond prices slid and help diversify its foreign exchange portfolio, according to Global Times.
Liam Hunt, Financial Writer and Analyst at GoldIRAGuide.com, understands China’s “diversification” move. “Given that the euro is currently trading at or near parity with the U.S. dollar for the first time in 20 years, it could be that China is selling its Treasury debt, receiving dollars in return, and planning to load up on cheap euros or euro-backed debt instruments,” he told International Business Times in an email.
Dr. Tenpao Lee, professor emeritus of economics at Niagara University, sees a broader goal in China’s “diversification” of its foreign asset holdings. “China wants to globalize its currency, RMB, and have a more independent monetary policy of its own,” he told IBT in an email. “Therefore, China has begun to diversify its international reserves with other currencies such as EURO, Japanese Yen, and British Pound since 2018. Moreover, China expedited this policy in 2022 by selling the U.S. Treasuries without specific reasons.”
But he sees another reason, too, America’s move to exclude Russia from the SWIFT system to punish its invasion of Ukraine, makes the dollar less appealing as a global currency. “To exclude Russia from the SWIFT system will hurt the status of the USD as a global currency and force other countries to consider alternatives for their international reserve policies,” he explains. “For example, Russia is now using China’s system for international trades rather than the SWIFT system. The success of a global currency depends on many countries’ willingness to accept and use the currency internationally. To exclude some countries from the system is a double-edged sword and will hurt the USD as a global currency and encourage competitors.”
Still, there are limits to how far China can go with diversifying away from the dollar before hurting its interests. First, it has a large and chronic trade surplus with America, which puts upward pressure on its currency against the dollar. Second, selling U.S. debt will add to that pressure and make Chinese products less competitive in U.S. markets vis-à-vis products from South Korea and Japan, hurting its exports to the U.S.
That’s the last thing Beijing wants to see as its economy has slowed significantly in recent quarters.
The bottom line: China’s selling of U.S. Treasuries may not last long. Thus, Wall Street shouldn’t make too much out of it.
Photo: Reuters / SHANNON STAPLETON
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