March 16, 2023
China’s US Treasury holdings fall to US$859 billion, lowest since 2010, amid rate hikes and tensions
- Reducing
investments in US Treasuries is seen as part of Beijing’s efforts to
diversify its portfolio, lower dependence on the US dollar and guard
against sanction risks
- Analysts expect the US Federal
Reserve to keep interest rates unchanged this month given the collapse
of Silicon Valley Bank and broader risks to the US financial system
China’s
holdings of US government bonds hit a 13-year low at the beginning of
the year amid American interest rate increases and growing tensions
between the world’s two largest economies, data released on Wednesday
showed. Chinese
holdings of United States Treasury securities slid to US$859.4 billion
in January, 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.
The latest figure was down
US$7.7 billion from the end of last year, more than double the US$3.1
billion cut in December, although slightly less than the decrease of
US$7.8 billion in November. Reducing
investments in Treasuries, a key component of Chinese foreign reserves,
has been widely seen as among Beijing’s efforts to diversify its
portfolio, lower dependence on the US dollar while promoting the broader
international use of the Chinese yuan and guard against the risk of
sanctions, such as those imposed on Russia for its invasion of Ukraine.
The declining Treasuries investment is also read as a sign of Beijing’s unease with Washington’s financial policies. The
accelerated decline in January was before the US Federal Reserve, as
expected, raised its benchmark interest rate by a quarter of a point on
February 1. During
the US Federal Reserve’s interest rate increase cycle, investors are
likely to reduce their holdings of US bonds to limit asset losses, while
central banks of other countries might also sell US Treasuries to
support their local currency or stabilise financial markets given rising
capital outflows risk.
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. The
continuous fall in China’s holdings of US debt also came amid the
widening geopolitical rift between the two sides of the Pacific.
The
meeting between US Treasury Secretary Janet Yellen and then Chinese
vice-premier Liu He in Switzerland in mid-January was a sign the two
powers were making 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 balloon incident in February, with their different positions on the
war in Ukraine and the Covid-19 origins investigation further adding
strain.
Before that, China’s US debt holdings had
been on a steadily downward trajectory since 2021 and in May last year
fell below the symbolic US$1 trillion mark for the first time in more
than 12 years. Some
analysts at that time argued it might be due to the fact that Beijing
needed to avoid the risk of “a possible conflict” with Washington. Chinese President Xi Jinping last week directly accused the US of leading other Western nations to suppress China’s development.
Echoing
his remarks, the Chinese central bank also for the first time vowed to
respond to US and Western containment in a meeting on Wednesday. In
contrast to China, Japan’s holdings of US Treasuries rose by US$28
billion to US$1.104 trillion in January, reversing a fall of US$6
billion during the previous month to remain the biggest investor.
Among the 10 largest investors in US government bonds in January, four cut their holdings compared with a month ago. China
had been one of the largest foreign holders of US Treasury securities
for many years. Japan took the lead in 2019 and China has remained the
second largest holder of US government bonds and a significant player in
the global bond market.
The sum total in January
of all net foreign acquisitions of long-term securities, short-term US
securities and banking flows was a net inflow of US$183.1 billion,
according to the Treasury.
US residents decreased their holdings of long-term foreign securities, with net sales of US$100 million.