Central Bank Dumps $300B in US Debt; Japan to Buy?

Despite the vicissitudes of the international market, China's determination to sell off U.S. Treasury bonds seems to have not weakened.

China Sells Off $300 Billion in U.S. Treasury Bonds

According to the latest U.S. Treasury International Capital (TIC) report, China continues to reduce its holdings by $7.6 billion, now holding $767.4 billion in U.S. Treasury bonds. From 2020 to the present, we have cumulatively sold $300 billion worth of U.S. Treasury bonds!

However, unlike China, Japan has been increasing its holdings of U.S. Treasury bonds against the trend for six consecutive months, with a total debt of $1,187.8 billion, remaining the largest creditor of the United States.

So, why does China continue to sell off U.S. Treasury bonds, while Japan goes in the opposite direction and keeps increasing its holdings? What is the current situation of U.S. Treasury bonds?

China Continues to Sell Off U.S. Treasury Bonds, Why Does Japan Increase Against the Trend?

Why does China want to sell off U.S. Treasury bonds? There are many reasons, but in the final analysis, it is actually "return" and "safety".

Let's talk about safety first. The U.S. Treasury bonds invested by China are actually a part of China's foreign exchange reserves, and a very important part. U.S. Treasury bonds are indeed the safest assets in the world, universally accepted globally, and are the world's currency itself. China bought a lot of U.S. Treasury bonds for better trade, with the maximum amount exceeding $1.3 trillion.

At its peak, China held $1.3 trillion in U.S. Treasury bonds.

However, as the China-U.S. relationship moved away from the honeymoon period, we found that the United States has become increasingly hostile to China, showing a trend of suppressing and containing China's development. Therefore, starting from 2016, we have planned to start selling U.S. Treasury bonds.From the chart, it can be observed that the period during which China held the highest amount of U.S. Treasury bonds was from 2010 to 2018. The current debt data has been consistently decreasing, indicating that China has been continuously selling off its U.S. Treasury bonds. Particularly starting from 2022, with the outbreak of the Russia-Ukraine conflict, the U.S. imposed financial sanctions on Russia, confiscating Russian assets and freezing their U.S. dollar holdings, leading to financial turmoil within Russia in a short period. Witnessing the precedent set by Russia, China must necessarily take measures to safeguard the security of its foreign exchange reserves.

The Russia-Ukraine conflict erupted, and the U.S. sanctioned Russia.

Therefore, Americans are always apprehensive about China selling off U.S. Treasury bonds and have arranged for Janet Yellen to visit China on multiple occasions, urging China not to sell. However, the root cause lies in the U.S.'s proactive sanctions against China and the escalation of frictions, which have made China's holdings of U.S. Treasury bonds "unsafe." This is the primary reason for China's cumulative sale of $300 billion worth of U.S. Treasury bonds in recent years.

So, what do we buy after selling U.S. Treasury bonds? The answer is gold. In fact, the recent sharp rise in international gold prices is largely due to purchases by the People's Bank of China.

Gold, as a precious metal, has a very limited annual production capacity, and supply and demand are generally balanced. However, when the People's Bank of China began to buy gold in large quantities, international gold prices would continuously rise due to changes in the supply and demand relationship. According to the latest data, the People's Bank of China's gold purchases rank first globally.

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The quantity of gold purchased by China.

Of course, the trend of gold prices is influenced by various factors, such as the Israel-Palestine conflict and changes in the Federal Reserve's monetary policy, which can significantly impact international gold prices. However, the continuous buying by the People's Bank of China is also one of the factors driving up international gold prices. This point is indisputable.

Although China continues to increase its gold holdings, in terms of proportion, China still holds too little gold. Our gold accounts for only about 4.3% of foreign exchange reserves, less than 5%, while the U.S. gold ratio is as high as 69.7%. Therefore, China is still very lacking in gold.

This means that if international gold prices are not too high, we will still sell U.S. Treasury bonds and buy gold, changing the currency ratio in China's foreign exchange reserves and safeguarding national asset security.The People's Bank of China continues to purchase gold.

In addition to safety, there is another important factor: "return on investment." Foreign exchange reserves are not only for safety; the central bank also needs to ensure that the reserves can maintain their value and even appreciate to some extent.

Since the Federal Reserve began raising interest rates in 2022, the US dollar index has risen, and the yield on US Treasury bonds has continuously increased, even breaking through the 5% mark at one point. However, the yield and price of bonds are inversely proportional. That is to say, the higher the bond yield, the worse it is. Holding bonds will result in losses.

Therefore, we have seen that since the beginning of 2022, the pace at which China has sold US Treasury bonds has accelerated. This is because our economists anticipated that the United States would need to continuously raise interest rates to combat inflation. Thus, selling US Treasury bonds can actually reduce foreign exchange losses.

The central bank needs to consider the safety of foreign exchange reserves.

When we combine these reasons, we will find that China's selling of US Treasury bonds may continue unless the Federal Reserve begins to officially lower interest rates for economic reasons. We may then reduce the intensity of selling US Treasury bonds.

China sells US Treasury bonds, why does Japan go against the trend to take over?

China sells US Treasury bonds for safety and investment factors, so why does Japan go against the trend to increase its holdings of US Treasury bonds? Is this taking over the US Treasury bonds?

Firstly, Japan's exchange rate is inherently unstable, so Japan needs to rely on a certain amount of US Treasury bonds to stabilize its own exchange rate. This way, when there are fluctuations in the exchange rate, the anchoring effect of US Treasury bonds can be used to stabilize the yen exchange rate.

Unlike China, Japan itself has a very close relationship with the United States. The United States has been continuously supporting and transforming Japan since World War II. Japan is also quite friendly and ingratiating towards the United States. Japan's increase in US Treasury bonds is also a way of offering a "letter of allegiance" to the United States, which is conducive to the stability and warming of US-Japan relations.The Bank of Japan takes over US debt, which can be seen as a form of "pledging allegiance."

In terms of military and geopolitical aspects, Japan is highly dependent on the United States. The Japanese have become accustomed to the "protection" provided by the US, believing that the US will safeguard their nation from invasions by other countries. This notion is deeply ingrained in the minds of the Japanese people.

From an economic perspective, Japan's purchase of US debt is also highly profitable. Since the US dollar interest rates have risen, the yield on US Treasury bonds has become very high. However, the yield on Japanese government bonds remains low due to deflation. The difference between the two countries is particularly significant.

As a result, a substantial amount of Japanese capital is invested in US dollar assets to earn high interest rates. For the Bank of Japan, it is also the case that buying US Treasury bonds for interest is much more cost-effective compared to assets with a zero interest rate. Moreover, given the good relationship between the US and Japan, Japan does not have to worry about its assets being frozen by the US. This is one of the reasons why Japan is willing to purchase a large amount of US debt.

To some extent, Japan's purchase of US debt is reasonable and justified, and Japan is indeed the largest "buyer" of US Treasury bonds.

In summary, why does China sell US debt while Japan buys more against the trend? It is actually due to the relationship between China, Japan, and the United States. The relationship between China and the US is deteriorating, with trade wars and technology blockades intensifying.

Furthermore, considering Russia's experience as a cautionary tale, we must be vigilant against the US's countermeasures against us. What if one day the US really uses its dollar hegemony to cut off China's access to the US dollar?

The financial war between China and the US continues.

For Japan, there is no such concern because Japan itself is a country with US military bases, and its foreign policy has always followed that of the US. Additionally, the interest rates on Japanese debt are lower than those on US debt, making it a very appropriate policy for Japan to buy US Treasury bonds.It can be affirmed that to a certain extent, political relations determine economic decisions. China's sale of U.S. Treasury bonds is correct because the United States is not worth it; isn't gold more appealing? For Japan, taking over U.S. Treasury bonds, maintaining a good relationship with the United States, and then being protected by the United States is the outcome they desire.