Beijing Will Shore up its Status as America’s Biggest Creditor

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China is set to continue expanding its holdings of US Treasuries according to the latest reports from state-owned media, just months after reacquiring its status as America’s biggest creditor.

The latest data from the US Treasury indicates that China increased its holdings of US Treasuries by USD$19.5 billion in the month of July, raising total holdings to $1.166 trillion in the sixth consecutive month of increase.

In June China surpassed Japan as the biggest foreign holder of US sovereign debt.

Data from China’s central bank further indicates that the country’s foreign reserves were $3.092 trillion in August, achieving seven consecutive months of month-on-month increase for the first time in three years.

A spokesman from the State Administration of Foreign Exchange said that a rise in the price of international financial assets was a key driver behind the August increase in China’s foreign reserves, with US Treasuries now comprising over a third of the total.

The People’s Daily, the Chinese Communist Party’s flagship publication, now reports that Beijing can be expected to further pursue modest increases to its holdings of US sovereign debt due to prevailing market conditions.

Zhang Yongjun (张永军), a researcher with the China Center for International Economic Exchanges, said to The People’s Daily that China has enjoyed a strong export performance since the start of 2017, and that it would continue to maintain a trade surplus.

At the same time outbound foreign direct investment by China is expected to decline significantly, which in tandem with the increase in foreign payments must necessarily lead to a rise in Beijing’s foreign reserves, as well as securities such as US Treasuries.

US Treasuries will remain the investment of choice for Chinese foreign reserves given its stability, safety and liquidity.

“When investing in securities it’s necessary to select markets with stable returns and comparatively strong liquidity,” said Zhang. “US debt enjoys a solid performance in this regard, while there is a market of sufficient scale and relatively high safety.”

Other domestic experts concur with Zhang’s opinion. Qu Fengjie (曲凤杰), a researcher with the International Monetary Institute of Renmin University, wrote in a recent essay that “for China, under circumstances where there is a surplus in the balance of payments and an increase in foreign reserves, the first choice is to purchase the most liquid US dollar assets.

“US Treasuries are the US dollar assets that best satisfy the two imperatives of security and liquidity, and following steady increases in foreign reserves, an increase in holdings of US Treasuries across several consecutive months is a normal affair.”

Zhang Yongjun further notes that anticipated gains in the US dollar serve as a further spur for China to expand its Treasury holdings.

“The US dollar has seen a comparative depreciation since the start of the year,” said Zhang. “With [the Fed’s] balance sheet shrinking plan, the standard assessment is that there is little likelihood of the US dollar continuing to depreciate, and a high likelihood of appreciation.

“Given these forecasts, purchasing comparatively cheap US-dollar assets can reap exchange difference returns.”

Zhang said that despite increasing its holdings of US debt for six consecutive months, China’s total holdings remain comparatively small as the pace of increase has been slow, and its impact upon the immense US debt market hasn’t been too significant.

As America’s biggest foreign creditor, however, an ongoing increase in China’s holdings of foreign debt could have an impact upon market expectations.

Qu Fengjie said that the maintenance of a trade surplus in combination with a significance level of US-dollar reserves would be of benefit to advancing the internationalisation of the Chinese yuan by firming up confidence in its value.

 

 

 

 

 

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