China dumps US Treasuries for fifth consecutive month, sending holdings to lowest level since February 2017

China’s holdings of US government debt have fallen to their lowest level since February 2017, following a fifth successive month of net US Treasury sales in September, according to a US government report.

China sold US$6.22 billion of US Treasury securities in September, lowering its total holdings to US$1.062 trillion, according to the latest monthly Treasury International Capital (TIC) report from the US Department of the Treasury.

Analysts cautioned that the reduction in China’s US Treasury holdings was not necessarily a sign it was reducing its overall US dollar-denominated securities holdings, since it could buy other assets such as stocks or corporate bonds instead.

Nevertheless, while reducing its holdings of US debt, China has been on a buying spree of Japanese government bonds this year.

According to data from the Japanese Ministry of Finance, China snapped up 27.7 billion yen (US$2.7 billion) worth of Japanese debt in September, resulting in 2.4 trillion yen of purchases over the first nine months in the year, up 73 per cent from the same period in 2019.

In addition, Hong Kong sold US$5.46 billion of US Treasury securities in September, cutting its holdings to US$245.47 billion, the lowest level since October 2019, Tuesday’s TIC report showed.

Japan, Ireland, Luxembourg, Canada, Thailand, Germany, Australia and the United Arab Emirates were among other territories to have reduced their holdings of US Treasuries to varying degrees. Those that increased their holdings of US debt included Britain, Switzerland, Belgium, Taiwan, India, France, Bermuda, Netherlands and Israel.

China lost its status as the largest foreign holder of US Treasury securities to Japan more than a year ago, in the midst of a bitter trade war between the two superpowers that some speculate could descend into an all-out financial war.

Ongoing discussions among Chinese academics have suggested that Beijing’s ongoing rotation of its US$3.14 trillion foreign exchange reserves could point to further shedding of as much as 20 per cent of its remaining US Treasury holdings.

This could be a move to insulate itself from tensions with Washington, including the risks of US financial sanctions and the potential seizure of Chinese assets in the US, according to ongoing discussions among Chinese academics.

China will “gradually decrease its holdings of US debt to about US$800 billion under normal circumstances”, Xi Junyang, a professor at the Shanghai University of Finance and Economics, was quoted as saying in September by the Global Times, which operates under the official People’s Daily, the Chinese Communist Party mouthpiece.

China does not publish the composition of its current foreign exchange reserves, nor a detailed account of how much US dollar-denominated assets it owns, as it considers the information to be a state secret.

The latest available official data showed that the share of US dollar assets in China’s foreign exchange reserves dropped to 58 per cent at the end of 2015 from 79 per cent in 1995.

Guan Tao, chief global economist at Bank of China Securities, said it would be inappropriate to interpret the reduction of foreign investors’ holdings of US debt as a decline in the status of the US dollar.

Foreign investors may reduce their investments in US government debt but increase the allocation of other US-based financial assets. And while the Chinese government may be a net seller of US dollar assets, the private sector may still be net purchasers, Guan said.

In the face of a retreat in foreign purchases over the past decade, the appetite among home grown buyers – from US mutual funds and pension plans to the Federal Reserve – is crucial to the US$20.4 trillion market.

Due to the large increase in US government spending to offset the economic damage caused by the coronavirus pandemic, Washington is on track to issue an unprecedented US$5 trillion in net new debt in 2020 to plug its exploding budget deficit.

US president-elect Joe Biden has called on the US Congress to pass another US$2.4 trillion stimulus bill to shore up the economy in the face of the recent sharp increase in virus infections in the country, though new legislation is unlikely until early next year.

Total US Treasury debt was about US$27 trillion in September and analysts predicted it will exceed US$30 trillion by the end of 2020.

The Treasury’s record US$27 billion 20-year bond sale this week was greeted with soft demand that sent yields in secondary market trading higher.

Meanwhile, global investors are reconfiguring their global portfolios to give Chinese securities a much greater role, with China set to be the only major economy to report positive economic growth for 2020.

On Wednesday, China’s Ministry of Finance’s sale of 4 billion euro (US$4.74 billion) in euro-denominated sovereign bonds received an enthusiastic response, with strong participation coming from long-term investors in Europe and the US.

A survey by HSBC Qianhai Securities showed 62 per cent of top international institutional investors and large corporations plan to increase their China portfolio allocations, by an average of 24.5 per cent in the next 12 months.

“The international appetite for access to Chinese financial markets is at an all-time high,” said Justin Chan, head of Greater China, global markets at HSBC. “A steady stream of developments, from index inclusion to the Stock and Bond Connect schemes is opening this market like never before, and yield hungry investors from across the world are piling in.”