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Is China halting US Treasury purchases?

14 January 2018

"I think the Chinese will contribute to the removal of liquidity from the US bond market", said Michael Shaoul, chairman and CEO of Marketfield Asset Management.

Investors worry that if China purchases fewer Treasuries, the US government will have to find alternative buyers.

But why does China hold so much United States debt?

"While U.S. -China tensions are rising, it is very unlikely that China would slow its purchases of U.S. Treasuries to warn the Trump administration against aggressive trade measures", analysts for the political risk consultancy, including Asia Director Michael Hirson and Global Strategy Director Karthik Sankaran, wrote in a note Thursday. "We have said many times in the past that these auctions are viewed as liquidity opportunities and today is no different", said Thomas Simons, senior money market economist at Jefferies.

China's foreign exchange reserves, the world's largest, rose US$129.4 billion in 2017 to US$3.14 trillion, as tight regulations and a strong yuan continued to discourage capital outflows, data from China's central bank showed.

And while 2018 has brought some telegraphed risks into sharper focus, nothing has rocked the foundation of the $14.5 trillion Treasuries market, said Aaron Kohli, an interest-rate strategist at BMO Capital Markets in NY.

Against the yen, the dollar posted a even bigger fall of 1.1 per cent yesterday, its largest decline in nearly eight months. "I don't think we're headed for investment Armageddon".

China wouldn't let geopolitical issues drive decisions on foreign exchange holdings, the Eurasia Group said, after Bloomberg News reported officials had recommended scaling back USA government debt purchases.

"There are also clear negative consequences for the value of the Dollars, which would concern China".

Beijing keeps a big share of its $3.1 trillion in foreign currency reserves in Treasury debt, which is considered safe and easy to trade.

As of the end of October, China held $1.19 trillion in U.S. Treasurys.

Reports of Chinese caution over U.S. debt could affect the bond yield curve and investor sentiment, and the doubts caused by the speculation contributed to falls on Wall Street overnight.

Yields slipped and bond prices clawed back their earlier losses after a solid 30-year bond auction.

In the eyes of some, Chinese officials may be trying to send a message that they have leverage with President Trump talking tough on trade.

ANLAYST'S TAKE: "Justifiably, Beijing's biggest worry is that the value of its US bond holdings will be eroded substantially by rising inflation and supply", Mizuho Bank Ltd. said in a daily commentary.

China wants its own currency, the yuan, pegged to the dollar.

The BOJ maintained the amount of its bond purchases on Thursday, helping to soothe a market rattled by its reduction earlier this week.

Is China halting US Treasury purchases?