Data purporting to show that China has been dumping its holdings of Treasury bonds have caught the attention of market bears and the financial press.
But one economist believes these claims have been greatly exaggerated. And he’s got the numbers to back this up.
A Different Perspective on China's Treasury Holdings
In a recent blog post that gained traction on Wall Street, Brad Setser, an economist and senior fellow at the Council for Foreign Relations, challenges the widely accepted notion that China has been actively reducing its Treasury holdings. Setser argues that a popular U.S. government data series on foreign buyers' holdings of U.S. assets fails to provide the full picture.
Setser's findings reveal that the notable shift in China's foreign securities portfolio over the past eight years primarily involves a preference for agency debt, such as mortgage bonds, over Treasuries. Though China has slightly decreased its Treasury holdings in the last two years, its total exposure to U.S. assets has remained relatively stable since 2015. This contradicts claims that China has been actively "de-dollarizing" amidst rising geopolitical tensions with the U.S.
According to Setser, "China has not been dumping its Treasury holdings, but people highlighting the TIC data to argue that China is dumping don’t understand the nuances of that data." He suggests that the slight reduction in China's holdings is likely due to a conscious decision not to reinvest the proceeds back into the market.
Implications for Treasury Yields
Provided Setser's calculations hold true, it appears that the recent surge in Treasury yields is largely unaffected by selling from one of the largest foreign holders of U.S. debt securities.
This alternative perspective on China's Treasury holdings challenges prevailing assumptions and sheds new light on the dynamics of global financial markets.
The Role of China in the US Bond Market
Wall Street bond-market analysts often point to factors such as the Federal Reserve's monetary policy, stubborn inflation, and concerns about the growing U.S. debt as the main reasons behind recent market selloffs. However, there are some voices on social media and elsewhere that suggest China's selling of U.S. debt is a sign that foreign governments are losing confidence in the American economy.
To provide a more accurate picture of countries' ownership of U.S. securities, the widely recognized monthly Treasury International Capital report (TIC) needs to be adjusted to account for these foreign custodian holdings.
Setser's methodology involves using additional U.S. data sets in conjunction with the TIC data, while also considering the impact of falling bond prices, which have led to long-dated Treasury yields reaching their highest levels in 16 years.
As of this month, the yield on the 10-year Treasury note BX:TMUBMUSD10Y stood at 4.711% in New York, while the yield on the 30-year bond BX:TMUBMUSD30Y stood at 4.887%. Both of these yields reached their highest levels since 2007 earlier this week.
According to Setser's analysis, China's U.S. dollar assets have remained relatively stable since 2015, ranging between $1.8 trillion and $1.9 trillion. It is estimated that approximately half of this amount is invested in U.S. dollar-denominated bonds, with around 40% of that consisting of Treasury bonds.
China's Treasury Holdings Hit Lowest Level Since 2009
The latest report from TIC reveals that China's Treasury holdings have reached their lowest point since May 2009, standing at $821.8 billion. This information, released on September 18, covers data from July as TIC data is reported with a two-month delay.
With a declining trend in China's Treasury holdings, this news comes as a significant development. It indicates a potential shift in priorities or investment strategies by the Chinese government. The decrease in holdings may have implications for both China and the United States, given the economic intertwined nature of their relationship.
While the report does not specify the reasons behind this decrease, it will certainly be a topic of interest for financial analysts and economists. Tracking the changes in China's Treasury holdings could provide valuable insights into their economic policies and global economic dynamics.
As the situation continues to unfold, it will be essential to monitor how China's Treasury holdings evolve in the coming months. This data will undoubtedly play a crucial role in understanding the changing landscape of international finance.
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