The recent substantial losses in US Treasuries have brought China’s holdings of these securities into sharp focus. As the debate intensifies over how high US yields might rise, economists like Torsten Slok from Apollo Global Management point out that China’s slowing economic growth translates into fewer dollars available for purchasing Treasuries. However, Mark Williams of Capital Economics argues that there’s “little evidence” to suggest that Chinese entities played a significant role in the recent turmoil in the world’s largest bond market.
China’s Crucial Role
China stands as one of the largest holders of US Treasuries, and its purchases play a pivotal role in keeping yields stable, especially in an environment of rising interest rates. Ongoing tensions with Washington have led to speculation that Beijing might diversify its foreign reserves away from US assets, potentially exacerbating the bond market’s sell-off.
Yields on 10-year US government bonds reached a 16-year high this week, while 30-year note yields surpassed 5% for the first time since 2007. The upward pressure stems from signals that the Federal Reserve intends to maintain higher borrowing costs for an extended period.
Brad Setser, a former US trade and Treasury official, dismisses the notion that geopolitical tensions have significantly influenced Beijing’s demand for US securities. He noted that China has shifted its dollar reserves from Treasuries to agency debt.
“It sort of makes sense – China does worry about the weaponization of the dollar and the reach of U.S. financial sanctions,” Setser wrote in a blog post. Yet he adds that “the best evidence available suggests that the dollar share in China’s reserves has been broadly stable since 2015 (if not a bit before).”
China has sold $183.1 billion worth of US government bonds since its Treasuries holdings peaked in November 2013. However, it has bought $543.5 billion of American agency bonds during the same period.
Torsten Slok of Apollo Global Management noted that China has been divesting Treasuries at a faster pace in recent months. “Growth in China is slowing for cyclical and structural reasons, and Chinese exports to the US are lower,” he wrote in a note. “As a result, China has fewer dollars to recycle into Treasuries.”
“There’s concern about both supply (how much debt will the government need to sell?) and demand (who will buy all those bonds?). And that dynamic can keep yields elevated and pressure risk assets like stocks and oil.” – Felice Maranz, MLIV strategist
Mark Williams, Chief Asia Economist at Capital Economics, emphasized that the data doesn’t support the claim that Beijing is distancing itself from US notes.
“Falls in the value of China’s recorded holdings of US Treasuries tell us little about whether China is divesting from the dollar,” he stated. “A broader look at the data suggests that it isn’t, despite geopolitical pressure to decouple. The analysis of the US Fed suggests that China has been a net buyer overall of dollar assets,” he added.