"Additional blow for the dollar": why China has reduced investments in US public debt to a minimum since 2010

China has reduced investments in US government bonds (treasuries) to a record low level over the past 12 years, according to data from the US Treasury Department.

According to the latest report from the department, in May 2022, the volume of Chinese investments in United States Treasury securities decreased by $22.6 billion to $980.8 billion, the value was the lowest since June 2010.

Treasury Treasuries are debt securities guaranteed by the US government.

States buy securities and receive a stable income from them.

In other words, government bondholders are lending their money to the economy of the United States.

Today, about a quarter of the total US debt ($30.5 trillion) - just over 24% - is treasury paper.

In addition to China, the main US creditors at the moment are Japan (the country has invested $1.2 trillion in treasuries), Great Britain ($634 billion), Switzerland ($294.1 billion), Cayman Islands ($293.2 billion), Luxembourg ($292.4 billion). billion) and Ireland ($289.3 billion).

“Countries buy US government bonds to safely store their reserves and earn relatively risk-free dollar returns.

Treasuries have high liquidity, which allows even the largest buyers to make transactions with low transaction costs, ”Mikhail Denislamov, senior analyst at Freedom Finance IC, told RT.

Keeping part of the reserves abroad allows you to protect the state's money from various economic shocks within the country.

In this sense, US Treasuries have traditionally been considered the most stable shelter from risks and have always been in great demand on the world market, Mark Goykhman, chief economist at the TeleTrade information and analytical center, said in an interview with RT.

“In turn, the popularity of American securities enables the United States to attract almost unlimited funding for its needs.

Now these borrowings cost three times less than inflation in the US, which has already reached 9.1%.

Accordingly, by accepting funds from outside, the country simply receives income, returning depreciated money over time, ”Goykhman added.

• US Treasury building

• © RIA Novosti / Alexey Agaryshev

China began to systematically reduce investments in US public debt back in 2019.

Then, against the backdrop of a trade war with the United States, China ceded to Japan the status of the largest holder of US government bonds.

“At one time, the Trump administration threatened to freeze Chinese reserves.

However, Beijing cannot sell all investments at once, as this would bring down the global stock market and lead to another global economic crisis.

Therefore, China is gradually withdrawing money from US assets, ”Alexander Razuvaev, a member of the Supervisory Board of the Guild of Financial Analysts and Risk Managers, explained in a conversation with RT.

illustrative example

An additional reason for the sale of US government securities by China was the tough anti-Russian sanctions of the West, experts are sure.

Recall that since the end of February 2022, the United States, together with the European Union and a number of other countries, continue to introduce ever new economic restrictions against Moscow. 

In total, more than 11.4 thousand restrictions have already been introduced against Russia (8.7 thousand of them since February 22), as evidenced by the materials of the global sanctions tracking database Castellum.AI.

Restrictions, in particular, affected the banking industry, the energy sector, aviation, trade and gold and foreign exchange reserves (GFR) of the country.

It should be noted that Russia managed to partially prepare for such a development of events and in less than five years almost completely withdrew its money from the American public debt.

So, if at the end of 2017 Moscow held more than $102 billion in treasuries, then in March 2022 the corresponding figure was only about $2 billion.

Nevertheless, even under these conditions, Western countries managed to freeze about half of the Russian gold reserves for almost $300 billion, which were placed outside the Russian Federation.

This development of events has become a wake-up call for China, experts say.

“Beijing is closely monitoring the situation around Washington's anti-Russian sanctions.

The blocking of Russia's international reserves in US assets has become unprecedented - on such a large scale, such blocking has never happened before.

Now in China they are afraid of possible similar actions in relation to their assets in the States,” Mark Goykhman explained.

According to the expert, possible reasons for such a blockage could be new rounds of a trade war or an intensification of confrontation between Beijing and Washington regarding the Taiwan issue.

In addition, in recent times, threats from the United States against China regarding the support of Moscow have been increasingly heard.

So, on July 18, the head of the press service of the State Department, Ned Price, said that a possible circumvention of anti-Russian sanctions or the provision of weapons to the Russian Federation by the PRC would be “very expensive” for Beijing.

China, in response to this, declared the inadmissibility of such statements.

“China has consistently taken an objective and fair position on the Ukrainian issue.

We strongly oppose anyone stating their baseless suspicions against the Chinese side and, moreover, defiantly threatening China.

Our country always opposes unilateral sanctions that disregard the norms of international law," TASS quoted Chinese Foreign Ministry spokesman Zhao Lijian as saying.

• Chinese Foreign Ministry Spokesperson Zhao Lijian

• © AP Photo / Liu Zheng

Signal for the market

Under the current conditions, China will continue to gradually get rid of American assets, suggests Alexander Razuvaev.

Moreover, according to the expert, other countries are already beginning to follow the example of the Asian republic.

“Most likely, in the near future, the Saudis and other Islamic countries will begin to withdraw money from US government securities.

Washington's action to freeze our reserves has undermined confidence in the US stock market and the dollar.

Now everyone understands that American bonds are not the most reliable investments in the world, as economists used to think, ”Razuvaev explained.

Note that back in December 2021, the volume of investments of all states in US government securities was about $ 7.75 trillion - the value was the highest in the entire history of observations.

However, since then, the figure has declined by almost $330 billion to $7.42 trillion.

According to Alexander Razuvaev, with a further decline in global demand for treasuries, Washington will eventually cease to have enough money to finance the budget deficit.

In this case, the country's leadership will have to cut military spending and spending on social programs.

To solve the problem, the States can restart the printing press, but this risks turning into an even greater increase in inflation and a blow to the reserve status of the dollar, Razuvaev is sure.

Meanwhile, investors have more and more concerns about the prospects for the US economy due to the consequences of anti-Russian sanctions, Artyom Deev, head of the analytical department at AMarkets, said in a commentary to RT.

“For the United States, which has pumped its economy with money for decades by selling debt securities, and for the dollar, this whole process means an additional blow.

Investors are losing faith in the world's first economy, which will also be weakened by the lack of the ability to lend to themselves through the influx of funds from other states, ”the expert concluded.