China weighs slowing or halting purchases of United States treasuries

Mae Love
January 14, 2018

Senior government officials in Beijing reviewing China's foreign-exchange holdings have recommended slowing or halting purchases of U.S. Treasuries, Bloomberg reported Wednesday, citing people familiar with the matter.

The Gordon Brown example highlights why Commonwealth Bank of Australia is saying Wednesday's reports over China and its US Treasury holdings are unreliable.

A forthcoming decision from Washington over whether to impose sanctions against China for its trade practices and alleged failure to enforce global sanctions against North Korea may also have been at play.

The U.S. dollar fell against a basket of major currencies on Wednesday after a report that China was ready to slow or halt its U.S. treasury purchases, with the greenback on track to post its biggest single-day drop against the Japanese yen in seven weeks. They also said that trade tensions with the United States were another reason to slow Treasury purchases, though they did not specify precisely why this was the case. It is also the biggest foreign holder of US government debt, ahead of Japan, and held US$1.189tn worth of US Treasuries in October, according to US Treasury Department data.

Other experts dismiss the idea that China would use bonds to play politics.

"The flush of money is being met by a flush of supply, and that produces higher rates", he said, noting that central banks have injected $14 trillion of liquidity into the market over the past five years.

Then as now, analysts say that while America's biggest foreign creditor has the power to jolt US bond markets, wide-scale selling by China is unlikely given that it has few alternatives to invest its $3.1 trillion in foreign-currency reserves, the world's largest stash.

Airbus China

A shrinking pile of overall foreign exchange reserves could mean lower demand for USA bonds. What's more, the Federal Reserve plans to keep hiking rates with a growing economy near full employment.

The exact composition of China's reserves is a state secret and the subject of intense scrutiny by global investors.

Bond traders want to know: Is this really what a bear market looks like? "The U.S. and China trade policy is a legit risk in 2018".

But why does China hold so much USA debt? That's just how markets work.

Yields rise when bond prices fall.

The stakes may be higher now as tensions with the US have been building since the election of President Donald Trump, who's been critical of the American trade deficit with China and other countries.

USA inflation data for December are due on Friday morning, with traders closely watching for hints (http://www.marketwatch.com/story/why-us-inflation-data-will-be-a-litmus-test-for-bond-buyers-2018-01-09) that consumer prices are picking up at a faster pace that could speed up the Federal Reserve's expected rate increases.

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