China has cut its purchases of U.S. Treasury securities to the lowest level since around 18 years ago, according to the latest U.S. government data. Beijing had approximately $618 billion worth of U.S. Treasuries at the end of July compared to $633.4 billion in June.
The July figure was the lowest since August 2008, when China’s Treasury stocks were approximately $573.7 billion, South China Morning Post cited data from Chinese financial data provider Wind. The most recent cut is a continuation of China’s shrinking investment in U.S. government debt.
In July, China’s holdings dropped by about $15.4 billion (2.4%). It had more than 11% fewer holdings than it did one year ago at the same time, based on data from the Treasury Department’s monthly report. China still has the third largest holdings of U.S. Treasury securities.
Foreign demand for U.S. Treasuries also declined
The cut by China coincided with a second consecutive month of a decline in total foreign holdings of U.S. Treasuries.
Foreign investors owned about $9.25 trillion in U.S. Treasuries in July, against about $9.30 trillion in June. The United Kingdom also boosted its stake, nearing $1 trillion, while the biggest foreign stakeholder, Japan, cut back on its stake.
Treasury data showed that Japan’s holdings dropped by roughly $12.8 billion to $1.104 trillion, while Britain’s holdings rose by about $58.4 billion to $998.3 billion. The movements indicate that the contraction in foreign purchases of Treasury securities was not even among the key foreign holders.
The broader sell-off is also coinciding with investors paying closer attention to U.S. government borrowing, and inflation and rising long-term bond yields. Long-term Treasury yields have been trending higher recently, which complicates the issues of financing America’s rapidly expanding debt burden.
China has been reducing its Treasury exposure for years
China’s new action isn’t a sudden development that started in July, but is an extension of a much longer trend.
In 2013, China’s investments in U.S. Treasuries rose to over $1.3 trillion, however, Beijing has been reshaping the composition of its foreign exchange reserves, and the amount of U.S. Treasuries that China holds has dropped significantly as a result. The decrease has occurred over a number of years, but sometimes the rate of decrease has been more pronounced in one month than another.
The wider diversification plans have been attributed to a number of factors, such as China’s need to diversify its reserve assets and rising geopolitical tensions between Beijing and Washington. Gold and other assets have become more important parts of discussions about reserve diversification.
But, the numbers in the Treasury should not be viewed as a comprehensive reflection of China’s overall exposure to U.S. government debt. The U.S. Treasury Department reports that much of the information it uses to determine international capital is based on custodial records, which means that securities held by a foreign investor in a third country through a custodian may be attributed to the third country. Consequently, the information cannot always be verified accurately as to the final ownership of each security.
What the latest numbers show
The July data clearly reflect the ongoing shifts in the market for U.S. government securities with the international community. China cut her Treasury stake to approximately $618 billion, Japan also saw a margin reduction and Britain did the exact opposite.
All while foreign investors continued to hold more than $9 trillion in U.S. Treasuries, which is to say the American government bond market still plays a vital role in global finance. Foreign residents also raised their stakes in Treasury bills and other short term U.S. securities in July, the U.S. Treasury Department said.
The new data thus suggest a shift in foreign demand for U.S. bonds, rather than the beginning of a mass exodus of foreign investors from U.S. debt. Although China’s decline is notable due to its magnitude and its longstanding role as one of Washington’s largest foreign creditors, other countries and investors still hold significant amounts of U.S. government securities, per the Treasury data.
