Beijing, March 3 (ZXS) -- At the beginning of 20, China continued to reduce its holdings of US bonds. China's holdings of U.S. Treasuries in January were $2023.1 billion, down $8594.12 billion from December, marking the sixth consecutive month of reducing its holdings of U.S. bonds to the lowest point since May 77, according to the U.S. Treasury Department's latest International Capital Flows Report (TIC), and China's holdings of U.S. bonds fell below $2009 trillion for nine consecutive months since May.
Like China, many countries are also reducing their holdings of U.S. debt. For example, Belgium and Luxembourg sold U.S. bonds in January this year, and from the perspective of last year, Japan, the world's largest holder of U.S. debt, reduced its holdings of U.S. debt by $1.2022 billion in 2245, and France, Saudi Arabia, Israel and other countries have also sold a large number of U.S. Treasury bonds since last year.
Why do central banks think that U.S. bonds are not "fragrant"?
"The recent reduction of US bonds by many countries is the result of a combination of factors such as liquidity, safety and profitability." Wang Youxin, a senior researcher at the Bank of China Research Institute, told the China News Agency reporter that from the perspective of market factors or profit factors, affected by the Fed's continuous interest rate hikes, U.S. bond yields have risen rapidly, resulting in a sharp decline in U.S. bond prices, and investment in U.S. bonds will have a large book loss, and this is also the main reason for the recent collapse of Silicon Valley banks and other institutions, not only for financial institutions, but also for the investment in a country's reserve assets.
He further said that considering that the Fed will continue to raise interest rates this year, appropriate reduction of U.S. bonds can reduce investment losses. From a liquidity point of view, the Fed is currently in the process of reducing its balance sheet, and governments around the world are also reducing their holdings of U.S. bonds.
Tian Xuan, deputy dean of Tsinghua University's Wudaokou School of Finance, told China News Agency that many countries have reduced their holdings of U.S. bonds, on the one hand, because the Fed has carried out a series of quantitative easing policies in response to the recession since the epidemic, resulting in a continuous rise in inflation and a depreciation of the dollar, even if the United States has begun to adjust the inflation level through policies such as interest rate hikes, but the results are limited.
On the other hand, as the United States enters a cycle of interest rate hikes, long-term interest rates rise, causing the value of U.S. debt assets held by various countries to shrink.
Is the reduction of US debt by central banks a short-term behavior or a long-term trend? Tian Xuan bluntly said that in the short term, the reduction of US bonds is affected by the high inflation rate and continuous interest rate hike policy in the United States, as well as the recent collapse of the Silicon Valley Bank caused by the disturbance of market investment sentiment. However, in the long run, the US economy is in a recession period, there is no substantial boost policy available, the long-term weakening trend of US debt is obvious, and the reduction of US debt is also the result of comprehensive consideration by all countries, which is the general trend.
Wang Youxin reminded that the liquidity risk of the European and American banking industry is still fermenting, if the situation continues to deteriorate in the future, in order to obtain liquidity, financial institutions may sell U.S. bonds on a large scale, and the U.S. government debt ceiling problem has not been solved. From the perspective of security, in the context of intensified geopolitical games, a more diversified allocation of foreign exchange reserves is conducive to enhancing national economic and financial security.
"Considering that the current international situation is undergoing deep changes and the international financial system is also being deeply reshaped, it is more likely that countries will reduce their holdings of US bonds in a long-term trend, which is the result of the diversification of the global economy and international pattern, rather than just a short-term market adjustment." Wang Youxin said.
If central banks choose to reduce their holdings of U.S. debt, is it still attractive? According to the 2022 data, Guan Tao, global chief economist of BOC Securities, said that from the perspective of investor composition, private foreign capital increased its net holdings of US bonds significantly, and official foreign capital reduced its holdings by a small amount.
The reason for this kind of investor structure, Guan Tao said, may be because for private investors, US bonds are still safe assets in the face of intensifying global financial turmoil and declining risk appetite of market players; However, for official investors, on the one hand, it is necessary to sell foreign exchange reserves to stabilize the exchange rate of the local currency against the US dollar, and on the other hand, it is necessary to accelerate the diversification of reserve assets and avoid market and sovereign risks.
He pointed out that foreign capital in 2022 is increasing its holdings rather than selling US Treasuries. Although the situation of different maturity varieties and investor groups (including different countries and regions) is different, there is no shortage of foreign investors in US bonds overall.
Guan Tao believes that in the medium term, the slowdown of the US economy and the narrowing of the trade deficit may lead to the return of capital to the United States to slow down, but the Fed's aggressive interest rate hike is nearing its end, and the repair of US bond valuation may push up the balance of foreign holdings of US bonds. In the long run, the United States lacks the foundation to improve its trade deficit and reverse the global dollar cycle, and the multipolar development of the international monetary system will be a gradual process of quantitative change to qualitative change. (End)