Reduced US debt changes scene

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A bank staff member counts RMB and US dollar notes in Nantong, Jiangsu Province. [Photo/Sipa]

More dollar liquidity to maintain financial stability and diversify foreign exchange reserves

Reducing China’s U.S. debt can help the country get more dollar liquidity to maintain financial stability and reduce its dependence on dollar reserves, economists and experts said Wednesday.

Noting that China is the second-largest foreign holder of US Treasuries, they said the drop in foreign holdings of US Treasuries reflected declining investor confidence in dollar-denominated assets due to the drastic monetary tightening. and high inflation in the United States.

Their comments followed US Treasury Department data that showed China’s holdings of US Treasury securities had fallen for six consecutive months to $980.8 billion at the end of May, from $1.0034 trillion in April and dropping below $1 trillion for the first time in 12 years.

The decline in China’s holdings is part of the global trend of shrinking holdings of US debt. Total foreign holdings of US Treasury securities stood at $7.4216 trillion at the end of May, down from $7.4553 trillion in April and marking the lowest level since May 2021.

Japan, the largest holder of US debt, held $1.2128 trillion in US Treasuries at the end of May, the third straight month of declines and down from $1.2185 trillion in April.

Experts said foreign investors had reduced their holdings of the US Treasury mainly to avoid losses caused by potential declines in bond prices due to continued interest rate hikes by the US Federal Reserve to control inflation at its peak. highest level for 40 years.

Zhang Liqing, director of the Center for International Financial Studies, part of the Central University of Finance and Economics, said yields on US Treasuries rise when the Fed raises interest rates. As bond prices move in the opposite direction of yields, this process would also mean bond prices fall, inflicting losses on investors who sell the bonds before maturity.

With the Fed raising interest rates by 150 basis points this year to a range between 1.5% and 1.75%, the yield on 10-year US Treasuries rose to around 3.01% on Tuesday. , significantly higher than the 1.52% seen at the end of last year, said market tracker Wind Info.

Experts said they expected another 75 basis point rise next week as the US consumer price index, a leading gauge of inflation, rose 9.1% in year-on-year in June, the largest increase since 1981.

Andrew McCaffery, global chief investment officer of Fidelity International, said the fall in holdings of US Treasuries by foreign central banks reflects concerns about real yields, which subtract the level of inflation, provided by Treasuries. American.

“Real (US Treasury) yields have been very negative, which has been offset by a strong dollar. But there are concerns that this may not be sustainable,” McCaffery said.

Shao Yu, chief economist at Orient Securities, said the fall in foreign holdings of US Treasuries underscored growing investor concerns about US debt risks and the credibility of the US government.

In addition to reducing potential market losses, China’s U.S. debt reduction can help it improve dollar liquidity, maintain foreign exchange market stability, and ease the country’s reliance on dollar-denominated assets for foreign exchange reserves, Zhang said.

While the drastic tightening in the United States raised concerns among investors, China adhered to a stable monetary policy.

Addressing the Special Virtual Dialogue with Global Business Leaders hosted by the World Economic Forum on Tuesday, Premier Li Keqiang said China will maintain its reasonable and appropriate macroeconomic policy.

The country will not deploy very large stimulus measures and excessively increase the money supply to achieve too high a growth target, Li said.

With current monetary policy remaining cautious, China’s latest benchmark interest rates released on Wednesday remained unchanged.

The one-year prime lending rate, a market-based benchmark lending rate, came in at 3.7%, unchanged from the previous month. The five-plus-year LPR, on which lenders base their mortgage rates, was also unchanged from the previous reading of 4.45%.

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