Even though China and the U.S. are geopolitical adversaries, China owns hundreds of billions worth of U.S. debt. Yet, the amount of those holdings has been steadily decreasing for years. Our March Global Rates & Money Flows gives you the background and explains why we’re keeping a close eye:
The swagger with which the U.S. government is conducting itself on the international stage is a symptom of a country which has enjoyed the privilege of having the world’s most popular reserve currency for the past 80 years. This, added to profligate borrowing, has made the U.S. Treasury market the biggest and most liquid sovereign bond market on the planet. Central banks and funds around the world have been virtually compelled to park money in U.S. Treasuries and lend to the U.S. government. Could this be changing?
The latest data shows that official Chinese holdings of U.S. Treasury bonds are at their lowest level since 2009. Back then, China was increasingly lending to the U.S. government, recycling its ballooning trade surplus:
The “Chi-merica” marriage seemed to work well. Americans bought cheap Chinese goods and China invested some of that surplus in U.S. Treasury bonds. The Great Financial Crisis and subsequent Quantitative Easing put a spanner in the works (British for gumming things up), slowing down Chinese lending to the U.S., and then the prospect and manifestation of trade tariffs from 2016 put things into reverse.
The last decade has seen official Chinese holdings of U.S. Treasuries decline markedly as the once happily married couple realize that they have irreconcilable differences. With the current U.S. administration upending international relationships, foreign investment into U.S. Treasury bonds may well decrease further. This increases the probability that, at some point, an accident in the Treasury bond market may occur. We’re keeping a close eye on those frequent and large bond auctions for any sign of decreasing demand.
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