China cut US debt holding amid 'risk of possible conflict'
A desire by Beijing to avoid "the risk of possible conflict" with Washington could have contributed to China cutting its holding of US government debt to below US$1 trillion for the first time in over 12 years, analysts said.
China's holdings of US Treasuries fell from US$1.003 trillion in April to US$980.8 billion in May, according to the US Department of the Treasury, representing the lowest point since May 2010 when its holdings stood at US$843.7 billion.
The US is dealing with its highest level of inflation in 40 years, while strained bilateral ties between China and the US over trade, technology and Russia have also contributed to the concerns.
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Hong Kong also slashed its holdings from US$195.4 billion in May to US$186.6 billion last month.
"It's essentially a matter of China-US relations," said Tan Yaling, head of the Beijing-based China Forex Investment Research Institute.
"The large holdings in the past were due to the good bilateral ties, but now China needs to avoid the risk of a possible conflict with the United States."
The reduction for the sixth straight month came at a time when Chinese academics and policy circles have held heated discussions over de-dollarisation amid the US strategic rivalry, including technological containment and the threat of decoupling.
Former central bank adviser Yu Yongding told a forum in Beijing in May that China should adjust its overseas asset portfolio, explicitly calling for cuts in holdings of US Treasuries, citing low return and increasing worries over their safety.
Beijing has long been diversifying its foreign exchange assets, with the proportion of US dollar assets dropping from around 70 per cent in 1995 to 58 per cent in 2015, according to data from the State Administration of Foreign Exchange.
China's current holding of US Treasuries represents around a 25 per cent retreat from its peak of US$1.32 trillion in November 2013 and a 10.4 per cent fall since Joe Biden took over as US president in January 2021.
US Treasuries now account for 31.4 per cent of China's US$3.07 trillion foreign exchange reserves, representing the lowest share since the global financial crisis in 2008.
China, according to Tan, could shift its attention to gold, projects under its Belt and Road Initiative and preparation for domestic risks amid the rising risks of a global recession.
Between October 2018 and November 2019, the People's Bank of China (PBOC) increased its gold holdings by 105.75 metric tonnes to 1,948 metric tonnes. China's gold reserves have remained unchanged since.
Short-term issues, including aggressive rate increases and planned balance sheet downsizing by the US Federal Reserve, also weighed on the decision to cut holdings of US Treasuries, analysts said.
Japan, which replaced China as the largest holder of US government debt in June 2019, also trimmed its holdings by US$5.7 billion to US$1.212 trillion at the end of May, representing the lowest level since January 2020.
Britain, Switzerland and Belgium all reported net purchases in May. Britain is the third-largest holder of US Treasuries behind Japan and China at US$634 billion at the end of June after adding US$21.3 billion.
Beijing's policymakers are closely watching the US Federal Reserve's rate decision next week, as the 40-year-high inflation rate of 9.1 per cent in the US could trigger another major increase after June's 75 basis point rise, which was the biggest since 1994.
Speaking at the Group of 20 (G20) meeting over the weekend, Chinese central bank governor Yi Gang said the PBOC would provide more powerful support for the national economy, which grew by only 0.4 per cent year on year in the second quarter.
"As a super-large economy, China will continue to align its monetary policy to domestic needs while taking into account internal and external balance," Zou Lan, head of the central bank's monetary policy department, said last week.
This article originally appeared on the South China Morning Post (SCMP).
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