China Is Quietly Offloading US Treasury Bonds: Big Trouble for Wall Street?

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According to Globaltimes, China has been quietly reducing its holdings of US bonds to the lowest level since 2010 and may do so again soon. This represents a significant change from prior years when China was purchasing US Treasury bonds, which could be problematic for the US debt markets for a number of reasons. First, the sale of U.S. debt held by China and Japan, two of the largest holders, could push up long-term interest rates in the United States. Second, the Federal Reserve is selling U.S. Treasuries as part of its Quantitative Easing (Q.E.) program, which has already been raising long-term interest rates.

Why is China selling US Treasury bonds? to help diversify its foreign exchange holdings and lessen losses as Treasury bond prices fell, according to Global Times.

Financial Writer and Analyst Liam Hunt at GoldIRAGuide.com is aware of China’s “diversification” initiative. He wrote to International Business Times in an email, “Given that the euro is currently trading at or near parity with the U.S. dollar for the first time in 20 years, it could be that China is selling its Treasury debt, receiving dollars in return, and planning to load up on cheap euros or euro-backed debt instruments,”

Dr. Tenpao Lee, emeritus professor of economics at Niagara University, believes that China’s “diversification” of its foreign asset holdings serves a larger purpose. In an email to IBT, he stated that China wanted to “China wants to globalize its currency, RMB, and have a more independent monetary policy of its own,” “So, starting in 2018, China has started to diversify its foreign exchange reserves by adding other currencies like the Euro, Japanese Yen, and British Pound. Furthermore, China accelerated this policy in 2022 by off-the-cuff selling of U.S. Treasury securities.”

He also notes another factor that makes the dollar less desirable as a reserve currency: America’s decision to bar Russia from the SWIFT system as retaliation for its invasion of Ukraine. Excluding Russia from the SWIFT system, according to him, will harm the USD’s status as a reserve currency and force other nations to think about other options for their international reserve policies. “For international trade, for instance, China’s system is now preferred over the SWIFT system by Russia. The acceptance and international use of a global currency depends on the willingness of many nations to do so. It is a double-edged sword to exclude some nations from the system because it will undermine the USD’s status as the world’s reserve currency and encourage rivals.”

However, China can only diversify so much away from the dollar without jeopardizing its interests. First off, it consistently runs a large trade surplus with America, which pushes its currency up against the dollar. Second, selling U.S. debt will increase this pressure and hurt China’s exports to the U.S. by making Chinese goods less competitive in American markets compared to goods from South Korea and Japan.

Iran claims that Saudi Arabia is prepared to intensify its peace talks.
Beijing doesn’t want to see that because its economy has been significantly slowing in recent quarters.

Conclusion: China may not continue to sell U.S. Treasury bonds for long. Wall Street shouldn’t take too much from it, therefore.

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