China’s US debt holdings at 12-year low, say experts

BEIJING: Experts say that Chinese investors’ holdings of United States treasuries are reaching a 12-year low, which will help China reduce market losses resulting from monetary tightening in the US and optimise the country’s international asset allocation.

China, the second-biggest foreign holder of US debt, had trimmed its holdings of US treasuries for seven consecutive months to Us$967.8bil (RM4.3 trillion) by the end of June, down from Us$980.8bil (RM4.38 trillion) a month earlier, according to US Treasury Department data.

China’s holdings of US debt reached a 12-year low in June, after dropping below the US$1 trillion (RM4.46 trillion) mark in May.

Meanwhile, the total foreign holdings of US treasuries stood at US$7.43 trillion (RM33.2 trillion) by the end of June, up Us$5.1bil (Rm22.8bil) from May, but down Us$88.1bil (Rm393.5bil) year-on-year, according to the Treasury Department.

Japan, the largest holder of US debt, reduced its holdings by Us$67.7bil (Rm302bil) since January, bringing total holdings to US$1.2 trillion (RM5.54 trillion) by the end of June.

Experts attributed the waning attraction of US treasury bonds to interest rate hikes, high inflation and the weakening economic outlook in the US, all of which have combined to impair the prospects of returns on this form of investment.

“Market participants’ long-term views on US treasuries have turned more bearish, leading to a decline in demand for US debt in a number of countries, including China,” said Ye Yindan, at the Bank of China Research Institute.

The US Federal Reserve’s (Fed) ongoing interest rate hikes could deflate the value of investors’ US debt holdings and increase downward pressures on the US economy, Ye said, adding that the risks holders of US debt face have intensified as the US national debt has increased to a record high.

With the Fed raising interest rates by 225 basis points this year to tame US inflation, which is hovering around a 40-year high, the yield on 10-year US treasury bonds increased to 2.79% as of Monday, up from 1.52% at the end of last year, according to market tracker Wind Info.

As bond prices move in the opposite direction of yields, this process has lowered bond prices, which would inflict losses on investors who sell the bonds ahead of their maturity, experts said.