China’s stockpile of US notes, bills and bonds shrinks to a two-year low as trade war rages on

The US government reported that China’s holdings of Treasuries fell to a two-year low, a slump that’s coincided with an escalation in tensions between the world’s two largest economies.

China’s stockpile of US notes, bills and bonds declined by US$7.5 billion in April to US$1.11 trillion, according to Treasury Department data released Monday in Washington.

Long-time observers of the data, including former Treasury official Brad Setser, have argued that some of China’s purchases are routed through locations such as Belgium, and the China tally itself doesn’t reveal the full picture. Belgian holdings have risen over the past year.

The issue is a sensitive one, as China watchers discuss the potential tools of retaliation the country has in the continuing trade war with Washington. Tariff hikes can only go so far, given the imbalance in trade between the two. The idea of dumping Treasuries to drive up American borrowing costs has been dismissed by many as likely to damage China as well.

“It’s a statistical artefact,” Michael Spencer, chief economist at Deutsche Bank in Hong Kong, said about the drop in Treasuries holdings defined as China’s. China’s official foreign-exchange reserves figures show little change in recent months, he said. “It’s entirely possible that there’s selling in one account, and buying in another.”

Spencer said that for Chinese policymakers, selling Treasuries “would be a singularly ineffectual weapon if they tried.”