China's mountain of U.S Goverment Bonds shrinks for fifth stright month
Data released on Monday showed China’s holdings of U.S. government bonds dipped again in October, to $1.138 trillion. That is the fifth straight month of declines and the lowest total since May 2017.
On a rolling 12-month basis, a measure that smooths monthly volatility, Treasury holdings have fallen for two straight months.
The data covers holdings of U.S. Treasurys by all Chinese investors, but it is closely watched as a proxy for how Beijing is managing its larger $3 trillion mountain of currency reserves. U.S. sovereign bonds make up a significant portion of that buffer, but Beijing doesn’t publish the exact composition of the reserves. China also holds some U.S. debt through custodial accounts abroad.
When the Chinese yuan has come under pressure before, the People’s Bank of China has sold Treasurys to weaken the dollar and reinforce the yuan. So movements in China’s Treasury holdings are scrutinized for signals Beijing is again intervening to prop up its currency. In 2015 and 2016, Chinese Treasury bondholdings fell by hundreds of billions of dollars amid a bout of capital flight.
Chinese holdings of Treasurys are still up from recent lows, of $1.049 trillion at the end of 2016, but are also well down from their late 2013 peak of $1.316 trillion.
What It Means
So far, the limited drawdown doesn’t indicate the same aggressive intervention seen in 2015 and 2016. But with these reserves playing such a pivotal role in the global economy, analysts and investors keep a close eye on changes for their knock-on effect on the currency.
On Tuesday, the U.S. dollar fell 0.1% against the Chinese yuan in offshore markets, to 6.8962.
A major selldown would send U.S. yields higher, but analysts reckon that would harm China too, by lifting the yuan, roiling markets and eroding the value of its remaining dollar holdings.
The yuan is likely to fall in 2019, moving beyond seven to the dollar and ending the year at around 7.1, according to J.P. Morgan economists and strategists, driven largely by the trade dispute with the U.S. The strategists expect China’s foreign-exchange reserves to shrink moderately, from $3.04 trillion at the end of this year to $2.89 trillion at the end of 2019.
Other analysts agree that the yuan will break past seven to the greenback; Daiwa Capital Markets, Bank of America Merrill Lynch and Goldman Sachs expect the currency to pass that level at some point in the next year.
The Chinese currency, which is also known as the renminbi, rallied earlier this month on a temporary truce on trade between the U.S. and Chinese governments, dropping from as high as 6.98 in November.
“Pressure on the renminbi may return in the coming months, however, given that we expect economic growth to cool further and U.S.-China interest rates to continue to move in opposite directions,” said Julian Evans-Pritchard, senior China economist at Capital Economics.
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