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The United States’ aggressive policy easing measures have sparked concerns over the value of the US dollar and global inflation. Photo: Reuters

‘China’s caution’ reflected in shedding of some US Treasury holdings as stimulus measures raise inflation risk

  • US Treasury data shows China’s holdings of US debt dropped by US$3.8 billion in March, month on month, to US$1.1 trillion – the first decline in months
  • Yield of benchmark 10-year US Treasury securities jumped to 1.7 per cent in March, up from 1.426 per cent on March 1 and 0.917 per cent in early January

Beijing may be taking a more cautious view of US Treasury securities, as Washington’s reliance on bigger fiscal stimulus and monetary loosening spark worries over the value of the US dollar and global inflation.

At the end of March, China’s holdings of the US government debt instruments dropped by US$3.8 billion from a month earlier, to US$1.1 trillion. This marked a retreat from the previous four monthly rises in a row, according to data released by the US Treasury Department on Monday.

Chinese holdings of US Treasuries, which now account for nearly one-third of its US$3.198 trillion in foreign exchange reserves, are often used to gauge the state of its relations with the United States.

Zhou Xuezhi, a researcher with the Institute of World Economics and Politics under the Chinese Academy of Social Sciences, said the single-month fall, considering the valuation effects, does not necessarily signal a reversal of Beijing’s investment strategy.

“But it mainly reflects China’s caution,” he said. “It didn’t have much confidence in the rebound of the US dollar index, and in the meantime took a wait-and-see approach on how US fiscal stimulus unfolded.”

The US dollar rose about 1.5 per cent in March, according to the Bloomberg Dollar Spot Index.

The administration of US President Joe Biden rolled out a US$1.9 trillion coronavirus relief package in March, followed by a proposal for his sweeping infrastructure plan valued at US$2.3 trillion. All of this will result in more fundraising from the market.

The Federal Reserve has been a major buyer of US Treasuries over the past year as part of its “quantitative easing” programme to inject liquidity in the US financial system, with its holdings having more than doubled since the start of 2020 to US$5.05 trillion. Fed officials have also said they will wait to raise interest rates until they see clear signs of a recovery in US employment.

The Fed’s continued loose monetary stance has helped fuel market expectations of higher inflation worldwide.

The yield of benchmark 10-year US Treasury securities jumped to 1.7 per cent in March, up from 1.426 per cent on March 1 and 0.917 per cent at the start of January.

China was not alone in slashing US Treasuries holdings in March. Overall, foreign positions dropped by US$70.3 billion in the month, including a decrease of US$17.3 billion for Japan, the largest foreign holder, data showed.

Ding Shuang, chief Greater China economist at Standard Chartered Bank, said there should be ongoing discussions about the rising US government debt, and subsequently about the value of the US dollar, but attempts to diversify away from dollar assets have proven to be difficult.

“One of the key questions is, ‘Does China have an alternative for investment?’,” he said. “Given the market size and liquidity, US Treasury [securities] remain a good choice in the foreseeable future.”

Despite staying on high alert to the spillover effects of the US loosening, including the potential challenge to cross-border capital flows and imported inflation, Chinese regulators have highlighted security, liquidity and the value of foreign-exchange assets in their management of the nation’s foreign exchange reserves.

At its annual work conference in January, the State Administration of Foreign Exchange (SAFE), which manages most of China’s foreign exchange reserves, pledged to adopt a “forward-looking” investment strategy and “dynamically optimise” investment portfolios in 2021.

China has not published the composition of its reserve holdings since 2015. However, the world’s second-largest economy is widely believed to have reduced US dollar assets in recent years as part of a diversification strategy.

In its most recent annual report, SAFE said that US dollar assets accounted for 58 per cent of reserves back in 2015, unchanged from a year earlier.

This article appeared in the South China Morning Post print edition as: Slide in US Treasury holdings flags caution