Real World Economics: Is there a masterplan to China’s U.S. treasury bond sales? (2024)

China is slowly selling down its holdings of U.S. Treasury securities. These fell from $1.081 trillion as recently as last November to $968 billion in June. That is a fall of 11.6 percent. This trend has caused a flurry of comments in financial media. Should we be worried? Will their action harm us? The answer probably is “no” for each question.

In last week’s discussion of background for this, one noted that many nations which are highly dependent on international trade choose to hold enough foreign exchange — money of other nations or gold — to pay for a year of imports or even two.

This is simply insurance that, come what may, they will have cash on hand to pay for vital raw materials for their industries and for petroleum and food. If you are going to stock up foreign exchange in this way, putting it into U.S. Treasuries keeps it safe and earns a bit of interest.

Understand also that the term “nations” is too general for good understanding. Some of China’s holdings of dollars are by the Bank of China, their central bank and equivalent of our Federal Reserve. Yet private Chinese corporations may also hold reserves of U.S. or Australian dollars, of Euros and of British pounds.

So what is happening in recent months may be entirely the doings of the Bank of China or entirely by CFOs of Chinese corporations or a mix of the two. Unless you have access to finer resolution data than the monthly Treasury release, “Major Foreign Holders of Treasury Securities,” you just cannot tell.

In addition, realize that both the Bank of China and private banks may have dollars that they are holding in forms other than treasury bonds. For either sector, their money might simply be in bank accounts in New York, London, Frankfurt or Tokyo. It might be in certificates of deposit or bonds issued by private corporations. So while the amount of U.S. Treasuries owned by China’s public and private sectors is an important indicator, it is not comprehensive or all its holdings.

Yet another complication is that some small, even miniscule, nations hold large values of U.S. Treasuries and other financial instruments.

Luxembourg, the Cayman Islands, Switzerland, Bermuda and the Bahamas together hold more U.S. bonds than does China. Switzerland has 8.6 million people but the other four together barely top another 1.1 million. Just the Caymans and Bermuda, with 130,000 population together, hold half again as many Treasuries as France with 67 million people or Brazil with 212 million. City-states Hong Kong and Singapore hold $29,500 for each of their people, China itself about $670 per person. In all cases, most of the money belongs to foreigners.

So are China’s moves meaningless? Just random? No, but this trend may simply reflect prudent rebalancing. A year ago, it took U.S. $1.20 to buy a euro. Today, the rate is one-to-one. China took a bath on whatever euros they had a year or two or three ago, at least in terms of their ability to buy oil or grain. Yet if they do want to own euros at some time in the future to cover their large trade with the European Union, now is the time to lay in a supply cheap.

Plus, of course, oil is expensive right now. China imports about $1 billion of crude oil and petroleum products a day. That’s over $300 million a day more than a year ago. Over a month, that comes to some $10 billion, roughly the amount by which Chinese holdings of dollars are falling. Take into account the higher costs of coal, iron ore, wheat and beef from Australia, soybeans and corn from the Western Hemisphere, and the huge economy has to be using up reserves in other currencies, too, even though the value of Chinese exports also is up.

Yes, when China sells U.S. Treasuries in bond markets, that pushes the prices of bonds down generally. And cheaper prices for bonds means higher bond “yields,” or interest rates. So China’s sales do piggyback onto similar sales by the Federal Reserve to implement its policy of raising short-term interest rates.

However, the relative quantities of money managed by the Fed and the U.S. Treasuries category of China’s overall foreign currency holdings provides a sobering perspective.

From March 2020, when COVID-19 first hit the news in our country, to March 2022, the Fed increased M2, the broader measure of the money supply, from $15.5 trillion to $21.7 trillion. That 40 percent increase was unprecedented for any major industrial economy except in wartime. The increase alone comes to five times the largest number of dollars either China or Japan have ever held.

A final factor discussed in all the hub-bub is whether China is eyeing the freezing of much of Russia’s foreign exchange holdings in reaction to its invasion of Ukraine. Do the Chinese fear the same would happen if it moved militarily against Taiwan?

I am sure that Xi Jinping is thinking of this, but there is nothing he can do. Small nations like Gabon or El Salvador might be able to squirrel a billion or two away in Panama or Crete or the Cayman Islands or Luxembourg. China similarly could tuck away a billion here and two there. But then it essentially is stuck. It has a monster of an economy and is highly dependent on trade, both in securing inputs and selling outputs. There simply is no way it can isolate itself from the international economy or keep its monetary wealth where it is safe and useable.

St. Paul economist and writer Edward Lotterman can be reached at stpaul@edlotterman.com.