China cuts holding of U.S. Treasury securities

The conventional wisdom is that the US is beholden to foreign agents as they hold much of the US government debt.  In this view, if these agents sell their securities, interest rates in America should increase as demand for US public debt evaporates.

Now comes evidence that China is indeed selling.  The BBC reports.

China reduced its holdings of US government debt by the largest margin in nearly nine years in June, according to data from the US Treasury.

China holds more US government debt than any other country and cut its holdings of US securities by more that 3% in June, said the BBC’s Chris Hogg…

The sales were made as the US treasury secretary was visiting Beijing to try to reassure the Chinese that their investment in his country’s government debt is safe…

In 2008, the Chinese increased their holdings in US debt by 52% over 12 months.

“China has said it would like to establish an alternative to the US dollar as the world’s favoured currency for foreign exchange reserves,” said our correspondent.

“So far there is no evidence that there is a suitable alternative. But these figures suggest they are exploring ways to diversify their investments where they can.”

But, as you have probably noticed, interest rates have not increased appreciably.  What gives?  Two ideas:

  1. The Chinese aren’t selling because there aren’t enough alternatives.  Just yesterday, there was a Bloomberg article indicating the Chinese are still very much interested in buying US public debt. They may even be moving out on the long-end of the curve.
  2. The premise that interest rates will increase is false.  If the US economy slows, this automatically decreases the current account deficit, meaning the US becomes less dependent on foreign sources to buy Treasury securities.  Increased private sector savings suggests more domestic sources of Treasury funding are now available.

On the whole, I would expect interest rates to rise as government budget deficits increase.  However, I have just presented you two reasons why this might not be so.

  1. Hans Walter says

    China’s reduced dollar amount of U.S. Treasury securities DOES NOT mean they’re selling, not necessarily. It could simply mean they’re not renewing expiring notes.

    1. Edward Harrison says

      Your point is semantics. Net sales is all that matters in regards to the debate on Chinese holdings.

  2. Mark Brown says

    Since the beginning of the year, we’ve seen a slow but steady rise in the interest rates of US Treasurys. In June, there was actually a fairly quick rise, and then a sell off as the rates regressed to the mean – but the mean is an upward sloping curve. See here:

  3. Anonymous says

    not sure if you have linked the news that china has made a $41Billion contact with Australia in Natural gas.

    It seems the Chinese are really serious about diversifying their reserves.


    1. Edward Harrison says

      I didn’t link to that one but I agree they are trying their best to diversify away from U.S. dollar financial assets. The truth is there are few ways to do so given how much surplus they are accumulating. Obviously, if they really wanted to avoid this problem, they would let their currency appreciate.

      In many ways, their dollar problem is one of their own making.

      1. Anonymous says

        Thanks Ed.

        Given that the treasury yield is so low, if Yuan is going to appreciate, then the first thing china going to do is to sell all their treasury to the market or to the Fed.

        3% appreciation in yuan implied they get virtually nothing (not accounting for all the transaction fees).

        There is an article from Michael Pettis two days ago. And it may worth to read, Ed.

  4. S. Lagavulin says

    Actually, the biggest factor keeping interest rates in check is that the US has become the prime buyer of its own securities. There’s been speculation on this for over a year now, and the Fed is finally owning up to it publicly.

    There’s nothing shady about the practice, it’s done all the time to roll over maturities and such, but the sheer volume of transactions, as well as the (very shady) suspicions as to how much buying in the last year was flooding in from unnamed off-shore sources like the Cayman Islands, lends credence to the belief that the Fed isn’t just trying to create stability but more likely is acting like a credit card junkie, shuffling the debt from one account to another in order to stave-off the collectors as long as possible.

  5. hbl says

    “But, as you have probably noticed, interest rates have not increased appreciably. What gives?”

    Hi Ed,

    I’m a bit of a broken record, but I think one of the biggest reasons is that private borrowing has been contracting faster than public borrowing has been expanding, so treasuries end up replacing other disappearing assets on many balance sheets:

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