China’s holdings of US treasury slip to 18-month low as it diversifies reserves

By Zhang Hongpei Source:Global Times Published: 2019/2/1 20:18:40

Diversifying reserves, preventing risks both play role: analysts

Photo: VCG

China's holdings of US Treasury securities declined for a sixth consecutive month in November, a trend that is highly likely to continue as Beijing seeks to diversify its foreign exchange reserves and reduce risks, analysts said on Friday.

However, sales of US bonds will be moderate and limited, they said.

China's US Treasury holdings fell to $1.12 trillion in November 2018, the sixth straight month of sales. It was the lowest level since May 2017, figures from the US Treasury Department showed on Thursday. 

The holdings fell $17.5 billion compared with the previous month.

The Treasury International Capital statistics showed that China remained the largest non-US holder of Treasuries by far.

Dong Dengxin, director of the Financial Securities Institute at Wuhan University of Science and Technology, told the Global Times on Friday that holdings of US debt are likely to keep falling, given potential risks due to the China-US trade friction and surging debt of the US government.

"As China is expanding economic cooperation and investment in such markets as the EU, Africa and countries and regions along the routes of the Belt and Road initiative, it will invest more in non-dollar-denominated assets," Dong noted.

"China's foreign exchange reserves require structural adjustment since around 60-70 percent of those reserves are dollar-denominated, which means possible worsening bilateral relations would have a big impact on China," said Zhou Yu, director of the Research Center of International Finance at the Shanghai Academy of Social Sciences.

There were positive signs as the latest round of high-level China-US trade talks wrapped up on Thursday (US time). Officials from the world's two largest economies made important progress, and they had "candid, specific and constructive discussions", the Xinhua News Agency reported Friday. 

"As the two sides are making efforts to ease trade friction and the yuan is gaining as the greenback weakens, China's holdings of US Treasury securities are likely to rebound," Zhou told the Global Times on Friday.

However, he added that in the long run, China's overall trend of shaking off heavy reliance on dollar-denominated assets won't change.

The People's Bank of China, the central bank, set the yuan's daily reference rate at 6.7081 per dollar on Friday morning, according to the China Foreign Exchange Trade System. Over the past two months, the yuan's exchange rate against the dollar has climbed over 4 percent from 6.97 to about 6.7.

IMF figures released early in January showed by the end of the third quarter last year, foreign exchange reserves denominated in yuan accounted for 1.8 percent that of the world's total, rising to nearly the same level as the Canadian dollar.

The share of the US dollar was 61.9 percent, the lowest in five years.

"It's not only China. Other major economies are also selling off US bonds as global investors have rising concerns over the protectionism of the US," Zhou noted.

In addition to currency assets, China joined other major economies in purchasing gold to prevent financial risks.

Overseas media reports have suggested that China might sell off US Treasuries as retaliation in the trade battle with the US. Such a move would bring down the prices of US Treasuries and thus inflict huge pressure on the US economy.

Fang Xinghai, vice chairman of the China Securities Regulatory Commission, clarified at the World Economic Forum in Davos, Switzerland on January 22 that China won't slash its investment in the US government bond market, domestic news site reported. 

"China will continue to be a savings surplus country for some time so we'll invest abroad, and the US government bond market turns out to be a good place to invest," Fang said.

"The claim of trade retaliation by selling US Treasuries is groundless. We can see that China's selling is within a moderate range and is based on expectations of return rates, a market-driven choice and not a political tactic," said Yu Fenghui, a professor at the Huazhong University of Science and Technology.

Newspaper headline: Holdings of US Treasury debt slip


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