A subscriber asks if China is dumping Treasuries; Is it catastrophic?

Is China selling off their Treasury holdings?

Chris,
I read an article yesterday that China is selling a lot of their US Treasury bill holdings.

Who is buying them – Japan? The article stated this is “catastrophic” for the USA. How would China’s sale of US Treasury bills be catastrophic if someone else is buying them?

Thanks,
Gary (Canada)

First, let’s take a look at the Treasury International Capital (TIC) data that is provided by the U.S. Treasury and Federal Reserve System. This data was updated on August 15th. I have provided a pdf file below for your reference.

MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES

 

Source: Treasury.gov monthly TIC data to 5/2019

From the TIC data contained in the table, we can see that China has sold off a small fraction of their Treasury holdings over the past 12 months.  Based on the longer-term chart, China has been gradually selling off its treasury holdings since at least 2013.

Would it matter anymore if China dumps its Treasuries?

As we can see, the impact of China’s purchase/sale decisions on the U.S. treasury market has already diminished over time, making the argument almost academic. China’s holdings as a percentage of the total is now down to about 5% from almost 10% at the height.

What would happen if China sold its Treasury holdings?

  1. It would deplete China’s own financial resources, dent confidence in the country as a responsible actor and spook global markets. China still needs the dollar for international transactions.
  2. Such a sale would be aimed at hurting the value of US Treasuries, thereby causing yields to spike. That would be a big deal because the 10-year Treasury rate serves as the benchmark for other forms of global credit, since the dollar is still the reserve currency. Global yields could rise.
  3. Selling would cause its own existing holdings to lose value.
  4. China has limited alternatives for what to do with all its excess cash. Redeploying the money into Japanese and German debt isn’t ideal. Both nations’ 10-year bonds are yielding negative right now, compared with the  1.5% yield for the 10-year US Treasury.
  5. Dumping treasuries would place downward pressure on the dollar and upward pressure on the yuan. Holding onto the cash in yuan would risk allowing China’s own currency to strengthen too much, which tends to be deflationary. It would hurt their own credit markets in the process.
  6. China has had to unload treasuries over time, as this has assisted China in supporting the yuan against the dollar in the marketplace. Despite talk to the contrary, China needs the yuan to keep a stable value, and the selling of its treasury holdings would work to firm up the value of the yuan. If China continued to increase its holdings, the downward pressure on the yuan would have been even greater. I would have to conclude that China’s treasury sales since 2013 have more to do with supporting the yuan and less to do with souring bilateral relations.
  7. China dumping Treasuries would risk destabilizing global financial markets at a time when they’re already jittery. Financial turmoil could spill over into the real economy, worsening the ongoing growth slowdown in China’s trading partners.

At the end of the day, regardless of what China does, the fears of China’s potential impact on the treasury market is probably overblown. Since global bond yields have fallen so far, if China sold now, the impact would be a lot less than if they sold last year. U.S. debt is viewed as among the safest assets on the planet and there’s ample demand from other foreign buyers, large life insurance companies, pension funds, and big banks. The current attractive yields offered on treasuries in relation to other developed nations would make them a sought out purchase. Any pop in yields would prove to be temporary.

One last point about this; The U.S. Fed could easily purchase any of the added supply caused by a large sale from China. We may actually see that sooner rather than later.