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posted on 02 May 2015

Cutting US Treasury Holdings Would Be a Wise Long Term Strategy for China

Written by , GEI Associate

In February, China cut US treasury securities holdings by $15.4 billion to $1223.7 billion, which is the sixth consecutive month that China has reduced US treasuries and falls to the lowest US debt holdings since January 2013. Although China is no longer US largest creditor, the further cut in US treasury holdings would still be a wise strategy to China.

  • First, as I mentioned in my previous articles, China is in period of reform shifting to a “new normal”, which aims to improve production quality and get rid of cheap exports. Therefore, reducing US debts could inhibit further depreciation of RMB against US dollar, thus effectively managing cheap exports.
  • Second, in view of trade balance principles, China has put great emphasis on trade balance in development of international trade. China did not pursue larger trade surplus recently, but tried to construct a more stable trade balance with its trade partners. Therefore, as reduced US treasury holdings would eork against cheap exports, the trade surplus between China and US would gradually decline. As a result, it is doubtless a positive signal for the improvement of trade relations between US and China.

  • Third, although exchange rate fluctuation exists, RMB is expected to present slight depreciation against US dollar in total. Moreover, on the one hand, the growth rate of China foreign exchange reserve is expected to slow down. On the other hand, China domestic capital outflows are still accelerated. Therefore, selling US treasury can also be considered as the reconfiguration of global assets.

In all, cutting US treasury securities holdings is a reasonable choice for China during the period of economic reform because China will encounter economic slowdown for its “new normal” and diversifying its economy.

However, some economists are anxious that the strategy may bring negative effect on US economy. But, in fact, US does not need to worry about China selling treasuries.

On the one hand, in comparison with US treasury securities holdings by top foreign creditors during the past year, the amount of treasuries sold by China is not large enough to disturb the market, and some other top US foreign creditors such as Japan are still willing to increase their holdings. In other words, it is quite limited effect on US treasury market for China (or some other governments’ authorities) to pursue diversification out of US treasury securities.

Instead of facing problems, the US dollar strength and current yield advantage still guarantee high attractiveness and liquidity for US treasury securities market, which positive trend is expected to continue in the future.

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