China Increases US Debt Holdings, Japan Sells Off
We all know that in the first half of this year, many countries were reducing their holdings of U.S. Treasury bonds, including European Union countries. Why reduce U.S. debt? That's because since the outbreak of the pandemic, the United States has been printing money on a large scale, leading to an unprecedented scale of U.S. federal government debt, reaching 30 trillion U.S. dollars, equivalent to 130% of last year's GDP.
At this time, everyone is worried about the risk of U.S. debt default. Reducing a certain amount of U.S. debt is actually a choice to avoid risk. Therefore, in the first half of this year, the world has been selling U.S. debt to de-dollarize.
However, the turning point of the incident occurred in July this year. Although many countries are still reducing their holdings of U.S. debt, China increased its holdings of U.S. debt in July.
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According to data, in July, Japan, Luxembourg, the Cayman Islands, Switzerland, Belgium, and Ireland reduced their holdings of U.S. debt by $2 billion, $2.6 billion, $8.5 billion, $8 billion, $3.6 billion, and $7.9 billion, respectively.
China, however, increased its holdings of U.S. debt by $2.2 billion in July compared to June, bringing the holding scale back to $970 billion, reversing the trend of continuous reduction for the previous 7 months. Among them, long-term Treasury bonds of more than one year reached $966.4 billion, an increase of $895 million compared to last month; short-term Treasury bonds of less than one year were $357 million, an increase of $1.34 billion compared to last month.
At this time, U.S. Treasury bonds have broken out of a one-sided global situation. What does this behind the scenes indicate? Does it mean that global de-dollarization is just a slogan? Don't worry, let me explain to you the reasons.
Let's first talk about the reasons why many countries reduced their U.S. debt in July, why is the largest holder of U.S. debt, Japan, still continuing to reduce its U.S. debt?
Although these countries are still reducing their U.S. debt as usual, their goals are completely different. The reduction of U.S. debt in the first half of this year was an active behavior, because everyone wants to avoid the risk of U.S. debt default. Now, the reduction of U.S. debt is a passive behavior.
Because the dollar is strong and interest rates are rising, leading to an outflow of dollars and a significant devaluation of non-American currencies. Let's look at a set of data, since August, the U.S. dollar index has jumped from 104 to 110, with a cumulative increase of more than 5.2%. Correspondingly, the British pound, yen, won, and euro have all fallen to their lowest values in the past 20 years. Now, the yen against the dollar has already broken through 144:1. In nearly a year, the yen against the dollar has depreciated by 32%.
So, the reason why countries are still continuing to reduce their U.S. debt now is that there is no other way. Because everyone wants to exchange their U.S. debt for dollars to intervene in the exchange rate of their own currency. If they do not intervene, countries can only be robbed by the United States.Especially in Japan, while the US dollar is being raised in interest rates, the yen is actually being lowered, coupled with the impact of international energy prices. In July of this year, Japan's trade deficit reached 1.4367 trillion yen, setting a record high for the same period in previous years. This means that Japan's ability to earn US dollars has also deteriorated. If they do not convert US debt into US dollars to intervene in the yen exchange rate at this time, I estimate that half of Japan's assets would be American.
After discussing the reasons why various countries reduced their holdings of US debt in July, let's talk about why China increased its holdings of US debt again in July.
Firstly, our country has the world's largest US dollar foreign exchange reserves, and our ability to earn US dollars is also very strong, so we are not worried about a shortage of US dollars. The current huge amount of US dollar foreign exchange reserves in our country can fully control the exchange rate of the renminbi. Even though the renminbi exchange rate against the US dollar has already broken 7, it is still within our controllable range. Therefore, we do not need to convert US debt into US dollars.
Secondly, affected by the significant increase in US interest rates, the inversion of long and short-term US Treasury bond yields has been expanding since July, and even the yield inversion of 2-year to 10-year US debt once reached 24 basis points. Under these circumstances, China moderately increased its holdings of short-term US debt with a maturity of less than 2 years, which can achieve investment returns comparable to long-term US debt in a shorter period.
This is easy to understand, as the principle is the same for countries and families. The key point is how to maximize one's returns by investing and managing finances when there is a lot of money.
Furthermore, in July, US inflation has quietly "peaked," which has eased the downward pressure on US debt valuations. This is similar to the stock market; once the bad news is released, it becomes good news. When US inflation was rising, everyone was worried that the US debt in their hands was not valuable or safe. Now that inflation has quietly "peaked," the returns on US debt have become more stable and secure.
Therefore, our country made corresponding adjustments to its US debt holdings in July, which was entirely considered from the perspective of its own interests in the medium and short term.
It is worth mentioning that, in addition to the polarization of behavior towards US debt between countries, there is also polarization between countries and private investors towards US debt.
In July, global private investors continued to buy US debt for risk aversion or to obtain the benefits of the appreciation of the US dollar, which led to an increase of $70.4 billion in the total scale of US Treasury bonds held by overseas investors in that month, reaching $7,501.2 billion.
This is because, as the risk of economic recession in Europe and America is increasing, more and more global private capital is viewing US debt as a reliable safe-haven asset and continuously increasing its holdings.To put it bluntly, if the European and American economies fall into recession, the U.S. stock market will definitely be greatly affected. U.S. Treasury bonds, on the other hand, are national debt issued by the United States. Therefore, even if the economies of Europe and America continue to decline, holding U.S. Treasury bonds will be safer and more reliable than holding U.S. stocks.
Now let's return to the topic at the beginning. Does China's increase in holding U.S. Treasury bonds mean that the global de-dollarization has failed? In fact, increasing or decreasing the holding of U.S. Treasury bonds is a medium-term behavior. It is for the consideration of its own interests, after all, the U.S. dollar is still the global currency in the short term.
As for the path of global de-dollarization, it is a general trend, a consensus, and a long and arduous road.
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