Beijing has been continuously cutting China’s US debt holdings since early 2022, with two exceptions – in March of this year and July 2022, when it increased holdings by US$20.3 billion and US$320 million, respectively.
Beijing remains the second-largest foreign holder of US Treasury bills after being surpassed by Japan in June 2019.
The reduction in US Treasury bills holdings between March 2022 and this past July – China dumped US$191.4 billion, Japan slashed US$116.5 billion, Ireland cut US$44.4 billion, Brazil shed US$8.6 billion and Singapore got rid of US$4.8 billion – was partly because of the slew of aggressive US interest rate hikes that have dampened bond prices.
The Fed has cumulatively raised its benchmark rate by 525 basis points since March 2022, to the range of between 5.25 and 5.5 per cent. In comparison, China’s one-year deposit rate for deposits at leading state-owned banks such as the Industrial and Commercial Bank of China, Bank of China and Agricultural Bank of China has been 1.55 per cent since September.
Also, Fitch Ratings stripped the US of its triple-A credit status in August. The rating agency cited the deteriorating three-year outlook of the US government’s fiscal standing and the drawn-out debt-ceiling negotiations between politicians.
Major financial institutions now expect that the US tightening cycle is very much near the end.
“We believe the policy tightening is done,” Societe Generale analysts wrote in a note on Friday.
And Dutch bank ING said that the US central bank is likely to “leave interest rates unchanged”.
That view is also supported by Chinese officials. Wang Chunying, deputy director of the State Administration of Foreign Exchange, said on Friday that the tightening is close to an end, and that its negative spillover effects, as seen in the capital outflows from emerging markets, will wane.
Wang Xinjie, investment strategy director with Standard Chartered Bank’s wealth-management services in China, also noted in a recent report that US Treasury bills could look attractive again, in terms of short- to medium-term returns, in the aftermath of each Fed rate upcycle.
Chinese authorities have long criticised the US dollar’s global hegemony, and their worries escalated after Washington froze US$300 billion worth of Russia’s foreign exchange reserves and assets held in the US, after the invasion of Ukraine in February 2022.
There have been growing calls among Chinese academics and policy researchers to reduce the share of US dollar-dominated assets to diversify China’s overseas investment portfolio, as they contend that Washington could further weaponise the dollar.
Ming Ming, chief economist of leading Chinese investment bank Citic Securities, said China has taken a holistic approach to de-risking and reducing its holdings of US assets.
“The US has shown it may impose financial repercussions on a country it deems to be an adversary,” he said in a July research report. “The US Treasuries and the US financial market are no longer that important amid [China’s] de-risking and diversification drive.”