China modestly increased its holdings of US Treasuries in May after they hit an 18-year low in April, though the move did little to alter a broader diversification trend that has seen Beijing steadily reduce its exposure to American government debt.
China’s US Treasury holdings rose to US$659.3 billion in May from US$651.1 billion in April. The amount reported in April was the lowest since September 2008, based on figures compiled by financial data provider Wind.
Meanwhile, overall foreign holdings of US Treasuries climbed to US$9.371 trillion in May from US$9.353 trillion in April.
Japan, the largest foreign holder of US Treasuries, cut its holdings to US$1.14 trillion in May from US$1.21 trillion in April, while the United Kingdom’s holdings rose to US$948.6 billion from US$937.5 billion.
In May, the US-Israel war on Iran remained a key source of geopolitical uncertainty despite a tentative ceasefire, with investors closely watching the risk of renewed hostilities and their implications for global growth and inflation.
The US Federal Reserve’s new chairman, Kevin Warsh, took office that month, with investors scrutinising his early policy remarks for clues on the future path of US interest rates amid lingering concerns over the central bank’s independence.
While Warsh’s first policy meeting as Fed chairman last month delivered a widely expected decision to hold rates steady, minutes released last week showed that “a few” participants saw a case for a rate increase, although they ultimately supported holding rates steady.
The notably brief post-meeting statement, coupled with the new Fed chairman’s decision not to publish a rate forecast – in line with his criticism of forward guidance – left investors with fewer clues about future rate moves.
In March last year, China slipped to third place among foreign holders of US Treasuries – behind Japan and the UK – continuing a gradual but uneven retreat that began during US President Donald Trump’s first term.
In contrast to its broader sell-off of US Treasuries, China has steadily added to its gold reserves, widely viewed as a hedge against geopolitical and financial risks.
Official data showed the People’s Bank of China increased its bullion holdings for a 20th consecutive month in June, bringing the total to 75.44 million troy ounces.
Barry Eichengreen, a former senior policy adviser at the International Monetary Fund, said that if erratic US policies and weakening institutional guard rails were to persist for another decade, the probability of an abrupt crisis of confidence in the US dollar would exceed 50 per cent.
In an online lecture last week co-hosted by the Society for the Analysis of Government and Economics and Tsinghua University’s Academic Centre for Chinese Economic Practice and Thinking, Eichengreen, now a professor of economics and political science at the University of California, Berkeley, also dismissed the idea that Beijing could use its massive holdings of US Treasuries as leverage by selling them en masse, arguing that such a move would not only disrupt the US Treasury market but also the broader global financial system, ultimately hurting China as well. -- SOUTH CHINA MORNING POST
