March 13, 2018
Investors are keeping an eye on China’s large stock of US Treasuries as trade tensions with the US mount.
China is the largest foreign holder of US Treasuries, with $1.18tn invested in the US government’s debt, according to official data. Investors are watching to see if the country begins to sell down its holdings, which would put pressure on Treasury prices to move lower, pushing interest rates higher.
China’s portfolio grew rapidly, from $478bn at the end of 2007 to $1.16tn at the end of 2010, aided by declining interest rates pushing the value of its holdings higher. The country predominantly holds Treasuries maturing in more than one year, with only $4.2bn invested in shorter-dated “bills”.
“China owns huge amounts of Treasuries,” said RJ Gallo, head of the duration committee at Federated Investors. “The US is not the only seat at the table with some cards in their hands.”
One of the primary reasons for China’s large Treasury portfolio is the trade deficit. US companies and consumers buy Chinese products with dollars. China then takes these dollars and invests them in US dollar denominated assets, such as Treasuries.
“If they were to sell Treasuries in a trade dispute, it’s a sensible thing for them to do,” added Mr Gallo.
It comes as nervousness about the commitment of foreign buyers is already mounting. Expectations of a more hawkish Federal Reserve committed to raising interest rates, alongside the Fed stepping back from buying Treasuries and supply increasing in the market due to deficit increases, all point to higher interest rates to come.
China shed $3.1bn of US Treasuries in December, adding to more than $10bn sold in November. Overall, foreign buyers — which own more than 40 per cent of the US Treasury market — were net sellers every month in the fourth quarter.
“In December, rates markets were wrapping up the year and [were] stillsceptical of higher rates, even after a significant tax cut and another Fed hike,” said George Conclaves, an analyst at Nomura in a February note. “It looks like overseas investors got the memo and were unwilling to accumulate USTs at year-end as foreign investors.”
But some investors urge caution before getting too carried away. The country has already embarked on a significant selling exercise through 2016 as it sought to prop up its currency by offloading dollar assets. At that time, domestic monetary proved more important to the direction of rates than Chinese selling pressure, said analysts.
If China does decide to start selling Treasuries and is successful in pushing up US interest rates and pressuring the American economy, it will also have depreciated the value of its remaining US Treasury portfolio.
Read more: America v China: How trade wars become real wars
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