Original article by Vivien Lou Chen, MarketWatch
Title: China’s Waning Appetite for U.S. Debt Could Reshape the Bond Market
The U.S. Treasury market has long benefited from robust demand by foreign buyers, with China historically being among the largest holders of U.S. government debt. However, recent developments suggest a shift that could bring significant changes to the dynamics of the U.S. bond market, interest-rate landscape, and global currency flows.
China’s Holding of U.S. Treasurys on the Decline
China has reportedly reduced its holdings of U.S. government debt from over $1.3 trillion in 2013 to roughly $767 billion as of early 2024. While this scaling back has been gradual, its implications are wide-ranging and more noticeable in recent years, as global economic conditions and rising geopolitical tensions influence the strategic decisions of large state actors.
According to data from the U.S. Treasury Department, this decline marks the lowest level of Chinese holdings since 2009. For a country that was once the world’s largest foreign holder of U.S. Treasurys, the cutback highlights both short-term and long-term pressures reshaping U.S.-China financial interdependence.
Factors Driving China’s Reduced Participation
Several interrelated factors are prompting China to pivot away from heavy U.S. debt accumulation:
– Geopolitical frictions with the U.S., particularly in technology and trade, have raised concerns in China about excessive exposure to U.S. assets.
– The potential for future U.S. financial sanctions has encouraged Chinese authorities to diversify their reserves.
– A broader strategy by China’s central bank to support the yuan and limit capital outflows amid internal economic challenges.
– A worsening trade imbalance has restricted China’s ability to accumulate excess dollars, thereby reducing its justification for large-scale Treasury purchases.
– Domestic needs, including struggling property markets, waning consumption, and debt-laden local governments, have placed pressure on China’s forex reserves and spending priorities.
Strategic Realignment of Reserve Assets
In recent years, China appears to be diversifying its reserve portfolio. Nations once heavily reliant on U.S. Treasurys are increasingly exploring alternatives to minimize dollar dependence.
China is undertaking a multi-pronged approach to shift away from U.S. debt holdings:
– Growing its gold reserves, with the People’s Bank of China building up holdings steadily.
– Investing in multilateral institutions and regional trade settlement mechanisms that bypass the dollar.
– Supporting the internationalization of the yuan in efforts to promote it as a trade and reserve currency.
– Strengthening trade ties with countries through the Belt and Road Initiative, in which loans and settlements are often denominated in yuan or local currencies.
Impacted Regions and Markets
China is not alone in reducing its holdings. Japan, another major foreign holder of Treasurys, has periodically scaled back its purchases, although to a lesser extent. However, China’s unique geopolitical consideration and large volume make its movement more consequential.
Markets potentially impacted by this trend include:
– The U.S. Treasury market, where decreased foreign demand could push yields higher if domestic buyers cannot fully absorb the debt.
– Global currency markets, where reduced dollar usage could contribute to long-term diversification into euros, yen, and yuan.
– Emerging markets, where investor confidence could be impacted by a less stable anchor in the U.S. debt market.
Pressure on U.S. Bonds
As China pulls back, the gap must be filled by other buyers — whether they be domestic institutions like banks and pension funds, the Federal Reserve itself, or foreign institutions from other nations. This shift could lead to:
– Higher Treasury yields, as reduced demand forces the U.S. to offer more attractive returns to entice buyers.
– Increased borrowing costs for the U.S. government and consumers alike, as Treasury yields impact everything from mortgage rates to corporate debt.
– A more sensitive fiscal planning process for the U.S. government, particularly in light of rising deficits
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