A leading Chinese economist says China has maintained a high level of investment in and exposure to US financial assets, despite sharp declines in its holdings of US Treasuries over the past decade.
In a recent opinion piece Guan Tao (管涛), chief economist with Bank of China International, points out that while China has undoubtedly reduced its holdings of US Treasuries, Chinese investors has compensated for this decline with a sharp increase in its holdings of other forms of stateside debt.
China’s holdings of US debt rise and fall in the 21st century
Guan points out that the scale of Chinese investment in US government debt rose sharply throughout the course of the Hu-Wen era as well as after the 2008 Global Financial Crisis, before hitting a peak in 2013.
According to figures from Treasury International Capital (TIC) reports published by the US Treasury, US government bonds held by Chinese investors first breached the USD$100 billion mark in August 2002. This figure continued to surge as China’s export sector revved up in the opening decade of the 21st century, passing through the $500 billion threshold in April 2008, before breaching the trillion dollar threshold little more than two years later in June 2010.
Chinese holdings of US Treasury bonds hit a record high of $1.3167 trillion in November 2013, following several rounds of quantitative easing launched by the US Fed to deal with the repercussions of the 2008 Global Financial Crisis.
Since then, however, China’s holdings of US government have waxed and waned. By April 2022, China’s holdings of US Treasury bonds dropped below the trillion dollar mark for the first time in nearly 12 years. Since then, this figure has fallen to $848.8 billion in February 2023, before staging a modest rebound to $869.3 billion in March.
During the period from June 2007 to May 2016, China accounted for over 20% of foreign-held US government debt, hitting a peak of over 28% at one point. China remained the biggest foreign investor in US government debt from October 2008 to May 2019, before ceding this title to Japan. By March 2023 however, China’s share of foreign-held US government debt had dropped to 11.5%, for its lowest level since 2004.
Negative valuation a key cause of China’s declining US debt holdings
Guan Tao argues that the decline in Chinese holdings of US debt isn’t just due to securities sales, but also the product of declining valuations amidst exchange rate fluctuations
TLC data indicates that Chinese-held US debt fell by $447.4 billion during the period from December 2013 to March 2023. Guan says that total net sales were $159.8 billion, accounting for 35.7% of the decline, while negative valuation effects were $287.6 billion, accounting for a whopping 64.3% of the total contraction.
“It can be seen that the decrease in the balance of US debt held by Chinese capital is the result of the combined effect of net reduction and the negative valuation effect, of which the negative valuation effect contributed nearly 2/3 of the total decline,” Guan writes.
Net reductions have become more prominent in recent years however, during a second round of declines in Chinese-held US government debt running from 2018 to 2022. According to Guan, this is because China has sought to reduce its exposure to US financial risks amidst worsening geo-political tensions.
“Over the past five years, the balance of US debt held by China has decreased by US$317.9 billion,” Guan writes.
“This wave of decline in the balance of U.S. debt held by Chinese capital is also due to the combined effect of net reduction and the negative valuation effect, with net reduction holding a slight advantage.
“Since this period coincides with an increasingly complex and fraught international environment, the selling of US debt by Chinese capital reflects to a certain extent operations to reduce exposure to US financial risks.”
Guan further points out that a slowdown in the growth of its Chinese foreign reserves as well as changes to its exchange rate policy have contributed to declining purchases by China of US debt.
“With the sharp slowdown in the accumulation of foreign exchange reserves, the ability of Chinese officials to invest in U.S. debt has been greatly weakened,” he writes.
“The marketization of the renminbi exchange rate has helped China reduce its over-reliance on the US dollar. Consequently, US debt has also lost an important supplier of funds.”
China still highly exposed to US finance
Despite the sharp decline in China’s holding of US Treasuries and efforts by Beijing to wean itself away from dependence upon the greenback in its foreign investment and trade operations, Guan says China remains exposed to US financial markets.
“We must avoid misjudgments regarding China’s overall financial risk exposure to the United States,” he writes.
“China has reduced its holdings of US Treasury bonds, but increased its holdings of other U.S. securities assets. Moreover, from 2018 onwards, the proportion of China’s goods trade surplus with the US transformed into investment in US securities has risen instead of declining.
“This means that in the process of reducing the accumulation of foreign exchange reserve assets by the government, although the government has reduced its financial risk exposure to the US, the private sector has still increased its financial investment in the United States.”
This diversification away from Treasuries into other US securities became especially pronounced over the past decade.
“From December 2013 to March 2023, Chinese investors sold nearly $160 billion in US treasuries. However, during the same period, China accumulated a net increase of $523.2 billion in US agency bonds, $17.1 billion in US corporate bonds $274.7 billion in foreign bonds listed in the US, and $3.8 billion in stocks of foreign companies listed in the US.
“Taken together, the net inflow of Chinese investment in US securities was $648.9 billion, equivalent to 19.5% of the US trade deficit in goods with China.”