China bought more US debt in May despite talk of financial war amid rising trans-Pacific tensions
- China added US$10.9 billion of the US Treasury securities in May, the first purchase since February, although the US$1.08 trillion total is slightly down from 12 months earlier
- Tensions have been rising between Beijing and Washington over the coronavirus, Hong Kong and Xinjiang, with questions raised over China’s access to the US dollar
China modestly increased its holdings of US Treasury securities in May, the first in three months, despite rising trans-Pacific tensions and growing talk of a financial war between the world’s two largest economies.
The modest growth came at a time when fears are growing that confrontations between Beijing and Washington over the coronavirus pandemic, the Hong Kong national security law and Xinjiang could spill over into the financial sector.
We don't have the data of [China’s] holdings of US stocks, so it’s really hard to look at this data from a particular angle
“We don't have the data of [China’s] holdings of US stocks, so it’s really hard to look at this data from a particular angle,” said Zhou Hao, a senior emerging market economist for Commerzbank.
The latest Chinese purchase of US government debt, however, showed that Beijing has yet to use its US$1 trillion holdings as a weapon, and is not being deterred by threats from some politicians in Washington that the US should disown some or all of the debt it owes China as a compensation for its perceived initial mishandling of the coronavirus outbreak.
China does not publish figures on its holdings of US Treasuries, meaning the US Treasury Department figure may account for only a part of the real amount as Beijing is also widely believed to use proxies to buy US government bonds.
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The increase of China’s holdings in May could be a result, in part, from a rise in the country’s foreign exchange reserves after it grew by US$10.23 billion to US$3.102 trillion last month, according to data of China’s State Administration of Foreign Exchange (SAFE). Some of the increase, though, was due to the revaluation of existing holdings and SAFE did not immediately respond to faxed questions from the South China Morning Post.
“If the day of freezing comes, it would be the day of doom for the dollar empire,” he wrote in an article published at the start of May.
Overall, China’s holdings of US Treasury securities stood at US$1.08 trillion at the end of May, below the US$1.1 trillion level at the end of May 2019.
China remains the second largest foreign holder of US government debt after Japan with US$1.260 trillion at the end of May despite having reduced its holdings in nine of the previous 13 months before May.
Foreign investors sold a total of US$27.7 billion in US Treasury bonds and notes in May, the third straight month of net sales, but bought a record US$79.7 billion of US equities amid a strong rally in risk assets, according data from the US Treasury.
