China sold the most Treasuries in more than two years in March, ratcheting up concerns that the country might weaponise its position as the US government’s largest foreign creditor in the ongoing trade dispute between the two countries.
China sold $20.5bn of US government bonds over the course of the month, according to data released by the US Treasury on Wednesday. The data covers trading in Treasuries with a maturity of more than one year by foreign official institutions such as central banks as well as private investors. Other major foreign holders, including Japan and the UK, were also net sellers.
Analysts noted the period covered by the data is before the latest breakdown in trade talks between the US and China and the subsequent increase in tariffs on Chinese imports by the Trump administration.
Except for a small net purchase last month, China has now sold Treasuries every month since September. A fear in the US is that China could ramp up its sales of Treasuries in an attempt to disrupt the market and put upward pressure on US interest rates, in effect raising borrowing costs for the US government.
“In almost all my client meetings I get a question over whether this tool will be used,” said Torsten Slok, chief international economist at Deutsche Bank. “The sheer size of [China’s] reserves and that this is even becoming a conversation means the market should take it seriously.”
On Monday Chinese officials said they would raise tariffs on an additional $60bn of American goods, following a sharp escalation in the trade war by President Donald Trump.
On Friday last week Mr Trump’s administration increased tariffs on $200bn worth of Chinese imports to 25 per cent after US and Chinese negotiators failed to reach a deal on the future trade relationship between both countries. The White House has since moved to levy additional duties on another $300bn worth of Chinese imports in response to the latest retaliation from Beijing.
But several investors and analysts have dismissed the threat that China will resort to such drastic action as to sell down its US Treasury holdings.
China is the largest foreign holder of Treasuries, owning a total of $1.12tn, meaning any increase in yields it could engineer would also mean losses on its own portfolio.
The size of China’s Treasury holdings are testament to the trade imbalance with the US. One of the reasons China buys Treasuries is because of the dollars it acquires from exports to the US. Analysts said China typically sells Treasuries when it needs to support its own currency, in effect selling dollars.
“This is going to be a long-term phenomenon where they are going to have to support their currency and ease financial conditions,” said Andrew Brenner, head of international fixed income at National Alliance Securities.
The sales in March stood out in part because the currency remained flat versus the dollar through the month. In addition, the sales had little effect on the direction of US interest rates’ 10-year Treasury yields fell 31 basis points to 2.41 per cent.
“Normally the answer to why this has happened has been very similar — it’s been the exchange rate,” said Mr Slok. “This time the number is more surprising. There are a lot of open questions.”