China has been steadily decreasing its stakes in US Treasurys since 2013. However, the extent of this reduction might be perceived as more dramatic than the reality, notes global macro strategist Joseph Kalish from Ned Davis Research. By November 2013, China's holdings in long-term US Treasurys reached $1.3 trillion.
Fast forward to August, and this figure dwindled to $793.5 billion, marking a 40% drop. The surge in bond yields has precipitated a fall in bond prices, consequently diminishing the worth of China's Treasury holdings.
However, evaluating this reduction against the yuan offers a different perspective. Given that the yuan has weakened approximately 20% against the US dollar since November 2013, the reduction doesn't appear as drastic. Kalish's estimates indicate a near 27% reduction in China's Treasury holdings when converted to yuan.
While some may interpret China's selling of Treasurys as a geopolitical signal to the US, it could also signify China's pursuit of more favorable returns within the credit markets. On average, China has reduced its long-term US Treasury holdings by $1.8 billion monthly.
Simultaneously, Beijing has increased its investments in agency mortgage-backed securities – guaranteed by US governmental bodies – by an average of $4.6 billion each month. Kalish posits, "Might China be seeking Treasurys alternatives that yield higher returns without a significantly greater credit risk?"
Furthermore, it's essential to recognize China's probable retention of US bonds in overseas custody accounts, particularly in Belgium and Luxembourg. Kalish points out, "Assuming that half of these European holdings are China's, an additional $120 billion could be attributed to China's holdings." Utilizing these channels aligns closely with China's foreign exchange reserves, providing a rationale for such strategic moves.
Combining China's augmented investments in agency mortgage-backed securities, the decrease in US Treasury assets, and probable overseas holdings, China's US bond holdings have descended by 21% since their 2013 zenith.
When this amount is translated into the yuan, the total dip is a mere 5% from 2013 levels. Kalish concludes, "While the headline figures suggest a substantial reduction in China's US debt holdings, a closer look reveals the downturn is less pronounced than perceived."
