Beijing, 17 August 2022 (TDI): In June, China’s holdings of US Treasury securities on the Chinese mainland fell to a 12-year low. It is reflecting a long-term diversification drive to minimize risk in the face of escalating tension.
#Chinese mainland’s holdings of #US Treasury securities fall to 12-year low in June, reflecting a long-term diversification push to hedge against risks amid rising tension. @globaltimesnews pic.twitter.com/caWFFaWJrW
— libijian李碧建 (@libijian2) August 17, 2022
US Federal government issued Treasury securities that are considered to be among the safest investments. It is because all Treasury securities are backed by the “full faith and credit” of the US government.
This indicates that the United States government will look after its bondholders even in the case of recession, inflation, or war.
China’s investment in US Treasury securities
China makes significant investments in US Treasury securities to maintain lower export prices. To create jobs, China relies on export-driven development.
China needs to keep its currency, low with the US dollar to maintain cheap export prices. Because they are safe and stable, China prefers to invest in US Treasuries over real estate, stocks, and other states’ debt.
China offers loans to the US so that the US can continue purchasing the commodities China produces. This practically implies that US debt offers the safest haven for Chinese foreign exchange reserves. It’s a win-win situation for both nations, with both benefiting mutually.
China to reduce holdings in US Treasury debt
US and China are having interdependent economic ties. But the tension between US and China increased continuously due to the economic and political competition between both states.
Federal Reserve System allows bonds to reach maturity and “roll off” its balance sheet, and the amount of money in the financial system tends to decrease.
This results in a decrease in the monetary base or the total quantity of money in circulation. Thus, a shrinking balance sheet has the same impact as an increase in interest rates.
China also reduced its holdings to their lowest level since June 2010. It is to limit losses as Treasury bond prices fell and, over time, diversify its foreign exchange holdings.
According to US Treasury Department data, China reduced its holdings of US Treasuries to $967.8 billion by the end of June 2022 from $980.8 billion a month earlier.
By the end of June, Japan also had decreased its holdings by $67.7 billion since the year’s beginning, totaling $1.236 trillion.
China will continue to reduce its holdings of US Treasury debt if the US continues to experience high inflation, drastic monetary tightening, and deteriorating economic prospects. But unless very extreme circumstances arise, it is unrealistic for China to slash all of its US debt holdings.
