China Dumps US Debt as Japan, Other Countries Bolster Treasury Securities

US dollar notes were being counted next to stacks of 100 yuan (RMB) bank notes at a bank in Huaibei, in eastern China's Anhui province, on Sept. 24, 2013.STR/AFP via Getty Images

Foreign holdings of U.S. Treasury securities rose in August, for the third consecutive month, to their highest level since December 2021, according to new data from the Treasury Department. However, China captured attention by continuing to dump vast amounts of U.S. assets.

Total holdings of U.S. debt increased nearly 3 percent year-over-year to $7.707 trillion. That was also up from the $7.655 trillion in July.

China reduced its holdings by more than $16 billion to $805.4 billion. That’s down by about 15 percent from the year-earlier period and the lowest since 2009. Chinese investors also offloaded about $5.1 billion in U.S. stocks in August, the highest on record.

Japan maintained its status as the world’s largest foreign holder of Treasurys, with investors in Tokyo raising their stakes by about $4 billion, to $1.116 trillion.

Other notable countries to bolster their holdings were the UK ($36 billion), Canada ($1.2 billion), and Saudi Arabia ($3 billion). Nations that trimmed their holdings included Belgium ($2 billion), Switzerland ($18 billion), Taiwan ($2 billion), and India ($600 million).

‘The Long Goodbye’

Market observers contend that China sold its U.S. debt and equity holdings to support the Chinese yuan for intervention purposes. Beijing officials have reportedly pushed state-run banks to resuscitate the yuan. When that becomes the mandate, the regime sells dollar-denominated assets and uses the returns to purchase the yuan.

This year, the onshore and offshore yuan have weakened considerably against the dollar, hitting the lowest level since late 2007. In 2023, the yuan has been one of the worst-performing Asian currencies, tumbling by about 6 percent.

Other economic experts argue that Beijing is attempting to rein in its finances during below-trend growth. As a result, officials might be using the government’s resources to prop up the world’s second-largest economy.

In the third quarter, China’s economy slowed to a 4.9 percent growth rate. While that lagged the second quarter’s 6.3 percent, it topped the 4.4 percent consensus estimate.

Diversification is another critical component of China’s war chest, with U.S. government debt representing about one-quarter of its total foreign exchange reserves, down from 59 percent nearly a decade ago. Beijing has been stockpiling a wide range of assets, from gold to crude oil to euros.

Nevertheless, some economists refer to China’s gradual dumping of U.S. assets as “the long goodbye.”

“After peaking above $1.3 trillion in late 2013, China’s holdings have since dropped by a combined $500 billion (or almost 40%) in the past 10 years to just a bit above $800 billion now,” BMO Capital Markets chief economist Douglas Porter, wrote in a note. “The reductions have clearly gathered steam in the past two years, likely aggravating the Treasury sell-off.”

If China loses interest in Treasury securities, it won’t be alone.

Disinterest in US Debt

In recent weeks, Treasury auctions have seen diminishing investor demand, including for three-, 10-, and 30-year bonds. The subdued interest has resulted from the federal government flooding capital markets with bonds and widespread concern about Washington’s fiscal path that many, such as Federal Reserve Chair Jerome Powell, contend is unsustainable.

The Treasury issued $1 trillion in bonds in the third quarter and is forecast to flood the market with another $850 billion. The national debt has topped $33.55 trillion, and the federal deficit is close to $2 trillion.

That said, there was some good news in the bond market as the $13 billion 20-year Treasury auction on Oct. 18 was met with robust and better-than-expected demand. This offered a reprieve in the selloff of longer-term Treasury securities.

The benchmark 10-year yield crossed the crucial 5 percent mark on Oct. 19 for the first time since July 2007. While it pared those gains and retreated below 5 percent again, the yield has rallied by roughly 40 basis points this month.

Investors took their cues from Mr. Powell, who told The Economic Club of New York that U.S. monetary policy isn’t too restrictive.

“Does it feel like policy is too tight right now? I would have to say no,” he said.

Federal Reserve Board Chairman Jerome Powell speaks during a press conference following the Federal Open Market Committee meeting at the Federal Reserve in Washington on June 14, 2023. Mandel Ngan/AFP via Getty Images

While he signaled that the central bank might be done raising interest rates, Mr. Powell left the door open for additional tightening if growth and inflation fail to moderate.

“Still, the record suggests that a sustainable return to our 2 percent inflation goal is likely to require a period of below-trend growth and some further softening in labor market conditions,” he said.

The Fed has shown no indication that it'll resurrect its immense bond-buying program.

The central bank is in the middle of reducing its balance sheet, which climbed to an all-time high of $8.9 trillion during the COVID-19 pandemic. Officials are unclear when the Fed could return the balance sheet to pre-pandemic levels, but they’ve offloaded $1 trillion in the past year. As a result, some believe that it’s unlikely the institution could start scooping up Treasury securities again.