Will China Halt US Treasury Purchases Over Trade Tensions?

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Reports that China is mulling a slow down in its purchases of US Treasuries sent tremors through bond markets on Wednesday.

Sources close to the Chinese government told Bloomberg that senior officials responsible for assessing China’s foreign-exchange holdings have called for a slow down or even an outright suspension of US Treasury purchases.

According to the sources officials recommend that China keep an eye on the outlook for the US sovereign debt supply when deciding to reduce Treasury holdings, as well as developments in relation to Sino-US trade tensions.

China conducts regular reviews of investment strategies for its foreign exchange reserves, which at USD$3.1 trillion are currently the world’s largest.

In addition to serving as a bargaining chip in trade negotiations with US, international observers note another motivation for China mooting reductions in Treasury purchases could simply be the need to diversify their investment portfolio.

“For years they have been bothered by the fact that they are so heavily invested in one particular class of US bonds, so it’s just a question of time before they would try to diversify,” said Charles Wyplosz, professor of international economics at the Graduate Institute of International and Development Studies in Geneva, to Bloomberg. 

Reports of a possible easing of US Treasury purchases by China come just as international debt markets launch a sell off in response to signs that central banks will dial back their stimulus programs, pushing yields on 10-year Treasuries to their highest levels since March.

The US government is also on the brink of expanding its debt supply, with the Treasury Department stating in its latest quarterly refunding announcement from November that borrowing is set to rise as the fiscal deficit increases and the Federal Reserve takes steps to shrink its balance sheet.

 

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