China Selling US Treasuries: A Shift in Economic Power Dynamics

China's decision to sell US Treasuries is a significant shift in economic power dynamics. China reduced its US Treasury holdings by $104.4 billion in 2020, according to the US Treasury Department.

This move marks a departure from China's long-held strategy of accumulating US debt, which peaked at $1.17 trillion in 2013. China's reduced holdings now stand at $1.07 trillion.

The implications of this shift are far-reaching, as it could lead to a decrease in US Treasury yields and an increase in the cost of borrowing for the US government.

Take a look at this: China's Holdings of Us Treasuries

China is aggressively dumping US Treasuries, selling a record $53.3 billion in US bonds and agency debt bonds in the first quarter of 2024.

This move is part of China's broader effort to diversify away from US dollar assets amid persisting trade tensions.

China's sales of US Treasuries have attracted renewed investor attention, especially as signs point to a potential deterioration in the relationship between the world's largest economies.

As of November 2023, the share of China's Treasury holdings in its foreign-exchange reserves fell to 27.9%, down from 32.9% at the end of 2021.

China is shifting its investments from US Treasuries to agency mortgage-backed securities (MBS), which offer a yield premium of 28 basis points over Treasuries.

The extra yield offered by agency debt over Treasuries has almost tripled from its low in November 2021 as the Fed raised interest rates to contain inflation.

China is on track to buy around $75 billion of agency bonds this year, or about half of all foreign demand for the securities.

Here's a breakdown of China's Treasury holdings:

China's move away from US Treasuries is driven by concerns about sanctions risk, trade tensions, and the need to prop up the yuan, which has weakened against a rallying dollar.

This trend could worsen if rising US protectionism continues to bolster the dollar's strength.

China's gold reserves have increased in the nation's official reserves, with the precious metal's share rising to 4.9% in April, marking the highest level since 2015.

China's massive sale of US Treasuries has significant implications for the global market. The sale of over $100 billion in Treasuries in a single month is a staggering figure that's not easily ignored.

The global market's reliance on US Treasuries as a safe-haven asset means that China's actions can have far-reaching consequences. This is evident in the sharp drop in Treasury yields following China's announcement to reduce its holdings.

China's decision to diversify its foreign exchange reserves has led to a decrease in its Treasury holdings, which has contributed to the global market's volatility. This is a clear indication that China's actions are having a ripple effect on the global economy.

The impact of China's sales on the US dollar has been significant, with the dollar experiencing a notable decline in value. This has made imports more expensive for the US, which could have a negative impact on the country's trade deficit.

The global market's reaction to China's actions has been swift and decisive, with investors seeking safer assets to park their money. This has led to a surge in demand for gold and other safe-haven assets.

On a similar theme: Are Us Treasuries Safe

China's sales of US Treasuries have been making headlines, but what's not as well-known is that the country is actually investing in other types of US bonds.

China has been buying up agency debt, including mortgage-backed securities (MBS), at a record pace. In 2022, it purchased a whopping $121.8 billion worth of agency debt, outpacing its sales of Treasuries.

The extra yield offered by agency debt over Treasuries has almost tripled since 2021, making it a more attractive option for China. This is likely due to the end of Federal Reserve purchases of MBS and rising interest-rate volatility.

China's agency bond purchases are expected to reach around $75 billion this year, which is roughly half of all foreign demand for these securities. This suggests that China is willing to take on more risk in pursuit of higher yields.

Here are some key statistics on China's US bond investments:

Note that China's Treasury holdings have declined to 27.9% of its foreign-exchange reserves as of November, down from 32.9% at the end of 2021. This suggests that the country is diversifying its FX reserves allocation to different asset classes.

China's Economic Power is on the rise. The country has sold a record $53.3 billion in US bonds in early 2024, aiming to lessen its dependency on the US dollar.

This move is part of China's broader effort to diversify away from US dollar assets amid persisting trade tensions. China has been selling both US Treasury and agency bonds, with Belgium, often viewed as a custodian of China's holdings, disposing of $22 billion of Treasuries during the same period.

The divestment has attracted renewed investor attention, especially as signs point to a potential deterioration in the relationship between the world's largest economies. The Biden administration has recently announced significant tariff hikes on a range of Chinese imports.

China's gold reserves have increased in the nation's official reserves, with the precious metal's share rising to 4.9% in April, marking the highest level since 2015. This could be driven by concerns about sanctions risk, as Gita Gopinath, first deputy managing director of the International Monetary Fund, noted in a speech.

China's efforts to prop up the yuan have been linked to its record sales of US bonds. The country's step away from US debt has been aimed at making imports less expensive, but the US Dollar Index has seen significant gains, while the yuan has declined.