China, a leading member of the BRICS group, has offloaded more than $21 billion in U.S. Treasuries since early 2024, a 12-year low for the world’s second-largest economy’s exposure to U.S. debt.
The figures are underlined by China’s biggest ever sell-off as it reduced its exposure by $53.3 billion in the first quarter of 2024 alone. Data from the 3rd quarter of 2024 has not yet been compiled, but at recent rates, they could add $5 billion to $10 billion this year.
China and other BRICS countries are selling billions worth of US bonds starting in 2022. This is a sign that BRICS and other developing countries want to move away from holding US assets in their reserves.
The dollar has been hit by the de-dollarization strategy being followed by the Global South and the inflation hitting the US economy at the same time.
US debt reached $35.6 trillion in 2024
China has been one of the biggest proponents of de-dollarization, using the yuan and local currencies in trade with other countries.
Moreover, while selling bonds, China is also massively accumulating gold in its reserves. China and the BRICS alliance are the biggest buyers of gold in 2022, 2023 and even 2024, provisional data show. Last year alone, China added several tons of gold worth $550 billion to its reserves.
This fits the narrative that the new BRICS currency will be backed by the precious metal.
Therefore, the BRICS and China are resorting to dumping US bonds before this happens, in order to have a leg up after this year’s US elections
Monetary tightening in the US
Chinese investors’ holdings of U.S. debt hit a 12-year low, Chinese experts said on Tuesday, Oct. 1, 2024, helping China reduce losses from currency tightening in the United States and optimize the country’s international asset allocation. .
China, the second-largest foreign holder of U.S. debt, had held down U.S. Treasuries for seven straight months to $967.8 billion by the end of June, from $980.8 billion a month earlier, according to U.S. Treasury data .
US debt held by China hit a 12-year low in June after falling below the $1 trillion mark in May. Meanwhile, total U.S. Treasuries stood at $7.43 trillion by the end of June, up $5.1 billion from May but down $88.1 billion year-on-year, according to the U.S. Treasury .
Japan, the main holder of US debt, reduced its holdings by $67.7 billion since the start of the year to $1.236 trillion by the end of June.
The declining appeal of US Treasuries is due to interest rate hikes by the Fed, high inflation and a weakening economic outlook in the US.
Market participants’ long-term outlook for US Treasuries has turned more bearish, leading to a reduction in demand for US debt in some countries, including China.
Continued rate hikes by the US Federal Reserve could deflate the value of US debt for investors and increase downward pressures on the US economy. The risks facing holders of US debt have intensified as US government debt has soared.
With the Fed raising interest rates by 225 basis points this year to tame US inflation hovering around a 40-year high, the yield on 10-year US Treasuries rose to 2.79% from 1.52% at the end of last year.
As bond prices move in the opposite direction to yields, this process has driven down bond prices, which would have caused losses to investors who sell the bonds before they mature, experts said.
In addition to the decline in bond prices, increased US inflation offset the seemingly high nominal yields on US Treasuries.
US Treasuries in Chinese hands may fall further amid the Fed tightening cycle and the US political cycle.
However, the decline may gradually slow, given US Treasuries’ status as a critical international reserve asset.
What consequences will there be?
However, with the continued development of China’s economy, the United States’ attitude towards China has also changed. Like high-tech products in the United States, China can no longer use trade dollars to go ahead with corporate acquisitions and investment in innovation, etc.
In addition, the United States has also imposed restrictions on China in many of its bilateral trade. Its purpose is not to threaten its position as the largest economy in the world.
In the process of past trade exchanges, China has accumulated a large amount of dollars, and the best way to use this currency supply was to buy US debt (whether public or private).
After all, the debt issued by the United States still has some credibility.
And while the US is the largest economy in the world, the dollar has always dominated the global monetary system.
If China continues to downgrade US Treasuries and sell them all, what “consequences” will there be?
Over time, China holds more and more US debt, and China has gradually become one of the three countries with the largest exposure to US debt. Holding a large amount of US debt is actually beneficial to China’s growth.
In the beginning, the reason why China invested in this US debt was mainly to promote domestic growth.
It was very beneficial to use the dollar as a foreign trade reserve currency.
For example, when the foreign exchange market fluctuates, China can use US Treasuries to balance its foreign trade balance. So the reason why China holds a large amount of US debt is actually for its own development.
Why won’t China sell all its US debt?
However, in the United States, when serious economic problems arose due to the effects of the epidemic, the solutions taken not only affected the development of their own economy, but also affected the development of the countries connected to them.
Although the influence on China of US inflation is relatively limited, prices in the country have indeed risen to varying degrees.
In addition, the exchange rate of major holders of US debt such as Japan has been affected to some extent, which has led to a large-scale sell-off of US debt in Japan.
Under the actions of the United States, many countries around the world are no longer optimistic about the development of the US dollar and have reduced their debts to the US, but in fact, this does not affect the overall economic development of the United States.
After all, the United States itself holds the largest number of US bonds, and most of the US bonds that were sold in large quantities have been bought back by the Federal Reserve.
Therefore, China’s reduction of US debt has no material impact on the United States.
In the future, the US economy is not ruled out to enter a new growth cycle, so China will not sell all the US bonds in its hands and mainly plan for future growth.
The monetary revolution in the global financial system with the de facto challenge of the dollar is not going to eliminate the dollar in the foreseeable future, but it will undermine the monopoly position it holds.
